F3Q09 (Qtr End 11/01/09) Earnings Call Transcript
Christine Day: ... The guest is truly responding to our unique product assortment and guest experience. Our focus on new colors and styles delivered weekly creates the scarcity model that drives an immediate guest purchase.[The Scarcity certainly works in my case] This focus combined with an upbeat staff and store environment have proven over and over to be a winning formula.
Our yoga line remains a core revenue driver. Wins include the introduction of increased choices of technical fabric in our tank line and a new, hot yoga line. We also continue to have an incredible reaction to our running line with an expanded line of crop, shorts and outerwear and our running skirt was a runaway hit. Our men’s business continues to grow with new product introductions such as our ripped compression line, more color and technical cloth. Our natural fabric line also continued to perform nicely.
E-commerce now carries our full line of products [Not really, certainly not all color choices are on-line] and we introduced free shipping in October. This drove increased traffic and conversion rates across North America. We continue to enhance the look, feel and performance of our site and to build our online community. To give you a sense of our online presence, lululemon is mentioned every 17 seconds online [by us Facebook fanatics?].
While John will speak to gross margin in detail, as a reminder we took some unique steps over the past year to position our business for the recession without turning to traditional promotions. Basically we added more value to our products such as technical functionality and other key features as well as new fabrics, all without increasing prices. This resulted in helping our sales in the first half of the year but pressuring our gross margin. We also focused our merchandising efforts on pieces that were certain strong selling price points such as layering pieces within our running line and reduced price on some key accessories to drive traffic.
...Our inventory is in very good shape for the fourth quarter. We finished Q3 with total inventory up 6% placing us in great inventory position heading into the holiday season. While we are utilizing air freight as needed, overall improvements in the gross margin due to sourcing initiatives and supply chain initiatives offset much of the impact to gross margin which we have historically felt when we utilized air freight. Also we will be bringing in March and April inventories in early this year due to the Chinese New Year which falls three weeks later in February, affecting shipments for the first quarter. This also allows us to meet additional demand in the fourth quarter without running the risk of having excess fall/winter goods.
...We definitely have seen e-commerce aid traffic to the stores both in the US and Canada because we see the guests pre-shopping off of the site and then going into the stores. But then because we have a scarcity model if they can’t find it at the store they run back and get it online. So we have seen it actually work both ways and as we have created more availability of the full SKU line online. That has definitely increased the number of visits that we have and we have just recently begun sending the shoulder season of items that we maybe move more quickly through in the stores a little longer on the website at full price. That has also really driven the e-commerce business. We feel very good about the cross channel synergy that we have been able to create with that combined with what I spoke to briefly, our social media strategy online creating that community experience has also really driven the business in both the stores and online as well.
...We do product notification so we will announce when we do a new drop of a product. Our click open rate on that is something incredible like 41%. We do know the guests from Facebook spend longer on our average site the total week about 20% and the number of Facebook fans we have we are the number 17 fastest growing on number of fans on Facebook. We have over 130 of our stores and showrooms have Facebook pages. We connect with over 100,000 fans daily.
When we send out those product notifications we see average increases in sales. It can drive over $6,000 in sales when we send one of those out. So since we have gone online we have about 2,000 interactions with fans on our Facebook page each week. [Yeah, but how many of them are unique? A lot of the FB comments are by the same two or three dozen people, I think] So the number of guests directly corresponding and looking at products. It is a pretty phenomenal community reaction.
Q: I was wondering how the inventory planning and flow was going in the e-commerce business. I was noticing some outages and out of stock in some products and sizes. I am just wondering, it seems like that business is ramping faster than expected and if it will be in a good inventory situation for holiday.
A: The reality is we do buy for that separately like a large store. It has significantly exceeded our expectations. We have also had to be chasing goods for the e-commerce. The reality that we are in is all channels are up so we are constantly shuffling inventory on a needed basis to all of the channels. That is creating outages occasionally in different items. There are also some we do buy shallowly on the more seasonal merchandise or special edition jackets, etc. that those are outside designs in limited amounts but really keeping in stock on the basics has been our focus.
...We are basically planning on keeping ivivva a Canadian concept at this point in time and then we would probably next move on e-commerce and then see where the shipping is in the US and then make a determination what we think the demand is. Right now we want to stay focused on building out lululemon stores in the United States. We would consider and are building contingency plans now to turn international on but right now we do ship internationally for regular lululemon items and we have seen growing demand in that area. So we are taking a look at what would it take to do that. But right now we have some very basic functionality improvement site performance that we want to stay focused on before we add some additional complexity.
Q: Can you tell us approximately what percentage of the consumer is made up of running and where you want to take that over the course of 2010?
A: Right now we are planning for running to be about 25% of our total penetration so it would be larger than the spend this year. Our yoga business is by far our most important as it still is our core. Running is just an addition and an actual extension of the technical wear that we do. So we would go from about the low teens to that 25% our current rate today is where we planning on being by early next year.
Q: You have really done a great job with the jackets. The lengths seem to be more democratic and flattering. [This was before the Cocoon, Super Tracker, and Principle]I wonder what we should expect to see with your jackets over the next several quarters as far as styling and then I have a follow-up question.
A: Shout out to the design team for that. We spend an inordinate amount of time actually fitting our garments and we use best in the world fabrics which is one of the reasons that they fit. In terms of our silhouettes I think part of the magic going forward of our mix is going to be that we provide long silhouettes for leggings so that you can outfit long over lean. We also have shorter, more slimming jackets that look great in front of our groove pants and then we have something in between. I think it is about the mix because no woman wants to dress the same way every time for her workouts and we have found this is sort of a magic formula. In addition we provide all of the layering pieces that are just a softer line so that they get the right outfit. So that is part of the magic.
