Our business momentum continued as we reported another strong growth quarter with total sales increasing 56% and our same store sales improving by 29%. All age classes are comping positive led by our 2008 and 2009 stores...
In Q3, we continued to focus on technical athletic products with yoga at our core and our success is evident in our latest results. Our floor technical products such as yoga pants and tops, including our new hot yoga line as well as our run line drove sales as well as our gross margin. This product carries higher merchandise margins when compared to categories like accessories and outerwear. We believe this product has benefited from innovation and diversified fabrics in our tank line and increased layers and technical features such as UV protection and reflectivity in our run line...
Another big part of our third quarter success was our e-commerce business. E-commerce sales were up over 200% from the third quarter in 2009. We improved our inventory position to support sales in the back half of the third quarter, which allowed e-commerce to jump closer to a natural level for this early stage business. And since our site carries and sells a larger mix of technical product and has proportionately fewer markdowns than do our stores, e-commerce also added to our gross margin and operating margin in the quarter. We believe that we are just scratching the surface in e-commerce and that a level of 10% of sales is achievable in the short to medium term...
Our newer businesses, as Aviva and Avila also performed well. [What's Avila?]
...As we look to 2011, we will continue to execute against our strong grand positioning. We will remain focused on our yoga and run lines to drive existing store sales. We will also expand our sales reach through our e-commerce channel with our planned transition to a new platform in the first quarter...
...Gross profit for the third quarter was $96.8 million or 55.1% of net revenue compared to $56.3 million or 49.9% of net revenue in Q3 of 2009...
Q & A:
A [re: e-commerce comparable sales] The average transaction is slightly higher on e-commerce. In terms of product mix, we tend to sell more of our core technical product online. I think because on e-commerce people are discovering the brand and establishing their wardrobe as opposed to adding their wardrobe.
A: [re: future looks for the stores] I think we've begun a planning team for what we call stores of the future. I mean we're really looking at future lines, will have and how many square feet to carry everything but that's so, just basically the beginning of a concept team so it's going to be a couple of years before you see us do anything as we work through everything from the supply chain because it's not just about a store design, it's about how do you evolve your business. And that takes a lot more time to plan so (inaudible) but we are working on a short-term fixturing and other things as we kind of incorporate new lines.
Q: Is there a new design of the Web site coming up? I think you talked about some changes just going on for the first quarter of '11?
A: If you've been on it you've noticed that we did post a new skin and we did a (inaudible) testing on the existing site to make sure we survived the Oprah onslaught that we got with a lot of visitors. So we did some testing, put a new skin on there. You can see already that we have a lot of new photography on the site because we've taken that in-house so we can really control the quality. The models are more like our models and in terms of how we want to project the brand and the products shows up so much better. So we're really happy with either some short-term changes and then have more planned once we launch the new site. So we follow an, execute what you can well strategy, so we'll phase in some of the changes rather than try to go live with a big bang.
Q: ...just wanted some update on running, where do you think it can go as a percentage of your business and how are you, how are you doing with the new sort of cold weather running product?
A: We're very happy welcome to the run penetration at 20%. What we currently have in stores has been very successful. ...And that's both in men’s and in women’s and then the layering systems that our design team has created so there's a layer close to the body that's generally Silverescent so looking anti (inaudible) wear with a mid layer and also outerwear has proven to really satisfy our running guests needs
Q: ...are there still key investments that need to be made and key members of management that need to be added?
A: I think in terms of your questions on key members of the management team, we are just taking off a search for a head of e-commerce and we want to bring in somebody with some global experience in that position. We've done it to protect the brand and grow it from the brand base with our internal talent and with that move Deanne, who has been heading that has moved to head our global brand and we're very excited about that because she knows it. And we don't, as you know do marketing in the traditional way, so we need somebody who understands how to do that internally. And then we'll continue, we really feel like we've built a lot of our supply chain, came out this year but we do have a head of R&D coming in and a creative person in Sheree, so that we're continuing to really create the vision for the future and have innovation as a regular part.
As you get bigger and the process part takes up a lot of your management time, you need to make sure that you have those centered innovations for the future. So definitely a slow down in terms of any kind of key positions at the executive level but you will see IT investments because we don't have a lot of the robust systems yet for the level of growth that we see coming in the complexity of the business and so those will be the major investments.
Q: On the gross margin front could you provide a bit more detail around the mix shift, your higher margin and core products, was that a conscious decision or are is this where you saw the greatest strength and then outerwear should be partially in Q4, kind of talk about your reasons for that and then also your performance for outerwear. [I think this question is referring to the fact that Luluemon had a lot fewer non-technical jackets this fall than they did last fall. Also, the jackets were not so experimental like the Sway and Purity. As you'll see below, Day says they changed the mix to respond to the US market who prefers core technical products like Defines and Grooves. As I have noted many, many times in this blog. I spot people wearing the technical wear all the time but rarely the casual Lulu stuff]
A: (John Currie CFO) Yes, the mix shift, I wouldn't say it was deliberate but we like it not just because it was a shift towards our highest margin products but it was a shift towards our core technical products. The real foundation of the company and as I said earlier I think it reflects the fact that we're attracting new guests. The shift in outerwear again, not anything dramatic or deliberate. It's just the drop of our outerwear which is again, this year for a brief period of time, came a little bit later so some of it was Q3 and some of it will be Q4 and the outerwear being a higher price point, slightly lower gross margin.
(Day) I would say that core is really where our guests were responding and just to echo what John was saying, our new guests that are adopting us particularly in the United States tend to love our core jackets and pants, like a groove pant, or Define jacket and so on and so forth and so it's just a natural mix shift, actually that's responding to demand and the great news is it's a very healthy shift for the business.
Q: Okay. I'll follow-up and you send then on the sales trend through the quarter in Oprah? [Re: something about Oprah - sometimes the transcript doesn't capture what is said very well]
A: Very little Oprah direct, you saw a little bit of a bump in our e-commerce channel during that week but we already had a pretty strong ramp so I think it was hard to track the individual. We certainly did sell more of the relaxed fit pants during that week but we also saw sales of all pants go up so I think it had a halo effect. But we also then had an equally strong week the next week so I think it's just part of the overall holiday ramp. We of course only knew a few weeks in advance that we would be selected so we weren't able to certainly bring in any big product and she typically doesn’t' like it if you promote off of that which we didn't do and really honored the relationship we have with her which is important. So it was nice but the reality was it was a very smooth growing sales ramp so healthy, profitable quarter. [HA! I was right - not much overall effect from the Oprah show]
Q: What percentage is the men's business now and are you happy with the penetration or is there opportunity to increase men into the brand?
A: Men's is about, between 10 and 12% of the business. Men's is ramping at a slightly higher rate than women's currently but is on much lower base and some of that is due to our Canadian guests as opting at a more rapid rate than they have in the past. The mix, typically the technical mix in Men's has improved considerably and will continue to improve going forward and we'll base our judgment on our performance going forward. I would have to say though that men's is, men's although there is opportunity we are primarily a retailer to women at this point in time and we can look at other opportunities for the future for that gender.
Q: some follow on to the e-commerce business and the rapid growth. If you could talk about some of the logistics behind it, inventory business are you working with a single pool of inventory or is it with distribution centers in Canada and the U.S. and the product offerings, do they duplicate what's in stores or is there an opportunity to test and have new product on line in small quantities? How do you see the Internet business developing for you?
A: (John Currie) Currently we're working with a fully out service model although we do keep the inventory and do our own distribution out of our Canadian EC for the Canadian market. In the U.S. it's a separate inventory held in the third party DC so it's as a result, more so in Q2 than Q3 you saw stock outs on line because we really couldn't shift inventory between channels very easily. That will be addressed as we shift to more of an in-house, e-commerce model, which as Christine mentioned we'll be doing in Q1 of next year and so the inventory for e-commerce, although we'll buy for it separately it will be held within the same EC as our inventory for store fulfillments so transfer between channels will become easier. [YAY!]
(Day)Regarding the product onsite it is all of the core product and it does receive all of the seasonal products as well. The buys are separate so it goes through it at a different rate than we see in the stores. There is a small and if (inaudible) mix shift a little more core product on that channel than we see in the overall stores which we feel very good. And we do some, occasionally some special things on the e-commerce site for that guest. We did a unique hoodie for them that went really well and then we do carry some shoulder items a little bit longer, are available on those after we pull them out of the stores. Some of the outerwear garments would be an example of that so there's minor differences but from time to time but the reality is it's probably about 98% of the core stock.
Q: I have a few questions. I wondered if you could talk about the incredible (inaudible) [Silver Luon] line. What kind of start has it gotten off to? Are you keeping the line tight or will you be expanding it to different silhouettes? And I wondered what kind of price elasticity you have since it's higher priced?
A: We don't have enough time to talk about it as much as I'd love to but anyway Silverescent is, Silverescent is a fantastic fabric for us. I fabric for us really understands the value of it and we are developing extensions of that line. Some of which you are seeing in the store right now so if you go over to our Lincoln Square store, in the front on the left you can see we have a new Silverescent line, jackets, pants, tank tops, et cetera, which are unbelievable performance garments and so we definitely see the possibilities there for Silverescent and other extensions to follow which we'll be able to announce in the future. But the price elasticity there, depending on what fabric it is, it obviously carries a premium. And so it's a very special yarn. Its yarn that is produced by a manufacturer that does hospital grade items highest and so it's of the very highest quality, which is why it's so difficult to find it. We're the only people that actually carry this yarn.
Q: I wondered if you could just speak to your limited edition product and special edition product? Are you happy with that? Will you be doing more of that throughout the year?
A: Sure, every year at this time we do special edition products. Our guests absolutely look forward to it and it also carries a premium in price because there's a very special design that goes into it and it's a very, very successful part of our line.
Q: Will you be doing more throughout the year or is just going to be holiday?
A: We will in our hoodie’s for sure and there's other core items that we're going to be doing special edition on. One of them was in the store if you could have gotten it in time which would have been, we have a cool racer back tank with ruffles on the back and it has been superb and really the Define jacket with ruffles and they, and one of our other jackets which also has been pretty unbelievable and has pretty much sold out.