Friday, September 10, 2010

Lululemon Q2 2010 Earnings Call Excerpts

 Here are some excerpts from the Lululemon 2nd Quarter Conference Call. Nothing very exciting except they are going to "re-launch" their website after Christmas to enhance the "digital guest experience".  I'm hoping they aim for something more like you find on Athleta's or Lucy's website. They also talk a lot about markdowns which is music to my ears. Sorry for the weird look with the highlighting. It's hard to do on a non-white background.

Day: In our second quarter our strong first quarter growth momentum continued with a 31% stores sales increase and net income that more than doubled last year’s second quarter results. Second quarter earnings were also more than 85% higher than our previous second quarter earnings peak in 2008 catching up to our pre-recession trajectory

Finally, e-commerce remained between 6% and 7% of total revenue for the second quarter. Although this means our e-commerce business as a percentage of total revenue more than doubled the second quarter of last year, we were again constrained by inventory on our site.

We are still on track to open 20 to 25 new stores in 2011 and will have the ability to leverage the knowledge we are gaining from all of our new 2010 showrooms. We also believe that we are just scratching the surface in e-commerce and will continue to add resources in order to push this channel to more than 10% of our sales in the near-term.

CFO Dude: So for the second quarter of fiscal 2010, total net revenue rose 55.8% to $152.2 million from $97.7 million in the second quarter of 2009.
The increase in revenue was driven by comparable store sales growth of 31% on a constant dollar basis, with our 2008 age class of U.S. stores in particular performing well above the company average. The addition of 12 net new corporate-owned stores in North America, since Q2 of 2009, which includes the Saskatoon franchise we acquired late in the second quarter.


Q: Christine, I think you were planning on re-launching the e-commerce Web site, and I don’t know if there was a decision made on the timing of that before or after Christmas. So, if you can maybe give us an update on that on what the improved functionality will be?

A: We did make the decision to go post Christmas. We didn’t want to do anything that did not allow us to capture all of the holiday sales. So, you will see it launch after the beginning of the year. Deanne, do you want to talk a little bit about some of the new…?

Actually, when we’d launch right after holiday there won’t be any major changes to functionality. The work is being done right now on the new and improved kind of guest experience, and you will see that in the next 12 to 18 months. Small, little quick wins will be added in January, but in general, you won’t see a substantial difference in our Web site post-holidays. will see a little bit of increased spend in IT, the Web site, the online, what we are calling the digital guest experience, so really creating additional investments in that space to capture what’s really been a successful platform for us with the guests. We’re really focused on building our technical R&D capabilities, so we’ll be making some investments in that area, both in headcounts and increasing some of the dollars that we spend on innovation, and then continuing to build out our supply chain production team so we maintain the quality that we’re known for, because I think that (inaudible) any break in that.

 Q: John, I think you’re talking about cost pressure affecting gross margin. Will we start to see higher retails in the store or how should we be thinking about that? I’m wondering about the performance or productivity of the Australian market. Christine, you may not want to be specific, but is that market performing at the levels of productivity that we understand the U.S. and Canada to be?

Also with respect to the e-commerce business, do you have a certain goal of where you see that business growing to as a percentage of sales? If you could just comment about the profitability there, because we’re hearing from most of our companies that the margin in that channel is higher than elsewhere, and retail businesses? Thanks.

A: Regarding cost pressures, because we’re mitigating as much of this, vis-à-vis smart planning and our great vendor relationships we don’t see this affecting our retails in the stores. We will however as we invent and invest in our new technologies, we will look at those retails as appropriate and if there is something that warrants it, we will apply the right value proposition [ph] for it, but there won’t be any price (inaudible) on any of our core items or key items.

Q: Have you seen good acceptance of some of your higher price points outerwear and other fashion items?

A: Outstanding in outerwear.

Q: I think I have one more on the e-commerce business, really do you see that being a bigger percentages, I mean 10% to 15% of the business?

A: Without addressing a timeline to that, absolutely. We buy for it separately and since it’s been a new channel and we do primarily grassroots, we don’t buy names, we don’t buy links or lists, and we really maintain it in the same brand strategy we do everything else. So what is that right sales strategy? We have inventory constrained and it’s very clear. Every time we up it, no matter how much we up it, we take it running at a very light number of weeks per sale.

So our big focus in this fall quarter has been to increase it to see how high it is. I’d just like to remind anybody new to the story that our inventory is different than a fashion retailers because its athletic technical wear, and we don’t have the same issues in holding inventory for a little long as long as it’s in that primarily core merchandise.

We also follow the strategy of pulling forward our line from spring and putting those in. So even taking inventory up a little bit to play into sales is a very safe bet for us. John went through in his numbers; we’re not even catching up to a sales trend with the inventories (inaudible).

Q: In the 10-Q you mentioned an increase in discounts adversely affecting the gross margin this quarter. I was just hoping to get some thoughts on the promotional environment and what we should be expecting for fall and holiday?

A: As we came into Q2, we did get into a better inventory position. As a result, we’re back to the more normal pace of markdowns that is typical to clear inventory. So the pace of markdowns in Q2 was more typical with what we’ve seen in the past and expect to see in the future.
 Q: And then in terms of the productivity of your U.S. stores where are you at in relation to your goal of being in line with the company average?

A: I would say looking at our comp position 31% in the U.S. stores in particular the ones opens two to three years ago are well above that average. What’s happening is during the recession the U.S. stores that opened in such a tough environment were lagging behind, they now seem to be catching up and back on or ahead of the trajectory that we expected and that we years ago saw as we expanded throughout Canada.

Q: Your new bags look great, could you talk about what you’re seeing on the accessory side and your efforts there?

A: Our bag assortment is like our outerwear assortment, it’s evaporating, and this is due to actually the great materials that we’re using, the great hardware, premium hardware that we are using and then the style and functionality that are going into each bag.

We’ve also upped our inventories in socks and underwear and other staple categories as well as our running accessories and other yields of accessories. So, we are on track with all of those. I think the primary reason for that is not only its function and styling but the fact that it all goes back to the deliveries that we are seeing in the functional apparel piece of the business. So, everything is quite synchronized right now and it’s paying off.

Q: And then just one quick follow-up on just the inventory number. So, I understand that a lot of that is been driven by an increased investment in core merchandise. Is there any way you can kind of break out how much of an impact that core reinvestment has on that year-over-year growth number or even the dollar number, if possible?

A: It’s very significant. I think there’s two factors that you want to look at there, one is that, and which is a very safe inventory position for us to be in, and really it’s about even guest loyalty, frustrating people on the core items isn’t something we want to do, frustrating them on that special jacket in terms of scarcity, I’m willing to do. And then the second is really shipping inventory into our e-commerce channel, which has been significantly constrained.

Q:  And then maybe just one follow-up on outerwear. This has been a great category for you guys for the last couple of fall seasons. Has it been extended for the fall relative to last year at all?

A: No, it hasn’t been extended. So essentially, we have four styles out there right now, which are all performing beautifully.

Q: I have a couple questions on women’s pants. I noticed that you recently added the higher waist Tadasana pant and I was wondering if this was something the customers have been asking for and if you plan on expanding this? And then also I know you do hemming, but I wondered if you’ve started offering a short leg, because sometimes hemming seems as the leg shape?

A: I think you’re referring to the Tadasana pants, which is performing nicely. I think the real answer to your question, Claire, is that, we provide a fit logic that accounts for not only what’s happening with the silhouettes and pants or any other article of clothing, but also that provides a range so that different body types and so on can wear our product. So far we have zeroed in on that logic, and we’re happy with it. The Tadasana is probably one of the highest rises that we’ve had in some time and we’ve gotten some nice performance on it

Store Trip - Try On Reports and Sale Sightings

I went to visit the store in Manhattan Beach today and tried on a few new things but left with nothing. I actually ended up buying a shirt at Lucy. I'm hoping now that they've been bought by Vanity Fair their quality has improved. We'll see.

I see a few new things have popped on loot. The Run Track and Field Jacket was $99 at the store. I was tempted but still think it's a lot for the striped ones. The Commit tank was $39 and they also had the static gray striped one marked down. There were left over Run: Energy tanks for $39. The store had old Groove colors for $79. I also saw a few Define and Stride jackets for $79 (in Angel and Potion). There were a few of the older Run Recharge tanks marked down to $39. I saw the static wave stripe scoop neck for $39. I didn't notice the Gather Racerbacks marked down but $39 from $42 is not much of sale - why even waste the sticker? I didn't notice Journey jackets but they probably got shipped out to another store. There were no super bargains - everything was at the first cut of markdowns.

I tried on the Run: Inspire Pullover. I liked the pink one the best but the static black was nice, too. I don't really care for the bands on color on the upper arm, it gives the top a ski sweater look. I thought the fit was in between the Energy Pullover and the Hills Pullover. Not nearly as tight through the chest as the Hills but not as loose through the upper chest and shoulders as the Energy. Also, the only circle mesh portion is under the arms which is quite a change from the previous pullovers. I don't know how I feel about the power luxtreme patches of color, they seem to add weight to the top. Some people have mentioned they can feel the back zipper pocket rubbing against them so make sure to look at that when you try it on. I didn't notice anything but I tried the top on with Still pants that come up very high on me.

I tried on the Swell jacket. What a joke. I wouldn't even get it on clearance for $14. Awful, awful fit. First of all, it only goes up to a 10 - for what reason exactly, Lululemon? The arms seemed kind of tight even though I was a size smaller than my normal size, I still think they were overly tight. They certainly look tight on the girl in the above photo.  I don't get Lululemon's obsession with tight arms. Doesn't anyone layer clothing in Canada? Especially jackets? Anyway, the jacket was short and poofed up, way up my stomach and it seemed there was no way to pull it down and make it stay down. The zipper was also very sticky and that sharp metal one similar to those used Flashback jackets. Those zippers look cool but they hurt and don't work smoothly. This jacket will go immediately to Loot.

I tried on the static charcoal and black mesh Cool Racerback. I love L-O-V-E the front. The static charcoal looks awesome with the black edging around the neckline and armholes and looks super sharp with black pants. However, I just couldn't get over the lingerie look in the back. I first tried it on with my gray Sattvic bra and didn't think it looked too bad but then I tried it on with a black Flow Y and just didn't like it. I also pretended like I was bent over a spin bike and didn't care for that look at all - all your secrets will be revealed when mesh is stretched over your skin. I hope Lululemon makes more of these static tanks with solid colored edging - it's very cute - but next time use opaque circle mesh in back.

I tried on the Personal Best Singlet. This is another tank that for unknown reasons goes only to a 10. It should be renamed the Make My Boobs Look Sad and Saggy Singlet. It might be a functionally great tank but for $52 it should look attractive on you. If you are large chested the seams will sit too high on your breasts. The twisted back was different but I've got to think that might become irritating when running long distances. Besides, the twist is very narrow so your bra will show.

I tried on the Inspire crop and really liked them. I thought the luxtreme felt thicker than some of my other crops like my Team Spirit. I thought they were very comfortable. I like that they don't have any circle mesh at the bottom. They are a bit longer than I prefer since I work out indoors in a warmer climate but they are a very nice crop. If you considering a luxtreme crop I think you might like these. Some reviewers find these looser fitting than other luxtreme crops. I find the Empowers feel tight (actually the tighest of all the luxtreme crops I've tried) to me so compared to those these are looser. I use my luxtreme bottoms for spin class and don't run in them so I can't comment about them falling down.

I tried on the Modern V-Neck Long sleeve in Classic Sport gray ash. I liked it but for $58 it's rather plain. I ended up getting a similar shirt at Lucy (the Precision Tee  in a heathered navy that is cuter in person)  that has a few more design details - like ruching on the sides and contrast seaming above the bust and across the back - that actually enhance and highlight the female shape (unlike the Modern V-neck!) for $42.

I've been dying to try on the Sage Twist pant but they had been shipped out to another store. I'm having the hardest time catching up with those! I would have liked to get a couple of the new mesh headbands but the store didn't have those so I ended up leaving with nothing. Anyway, I might visit a couple more stores this weekend or Monday now that I know there are new things on markdown. However, I can't think of anything I would get unless it was marked down to the $20 range. Maybe the Track and Field at $50-ish.

Let's Talk About Quality

Before I discovered the fancier athletic wear brands, I used to buy Adidas stuff. My Adidas held up awesomely - no fading, no unraveling stitching, no discoloration under the armpits, and most importantly it didn't require any tender care. No washing on delicate cycle in cold water and hanging it dry. Sure it was boring and didn't fit or perform that great but it was relatively inexpensive and it held up like a tank. Then I discovered Lucy and bought quite a few items. However, I stopped buying Lucy after awhile because the technical wear unraveled on me at the hems and the dark colored cotton stuff discolored under the armpits with perspiration. Now I only buy Lucy when it's dirt cheap on sale or made by another company like Pink Lotus or Splendid for Lucy. Lululemon, and I hate to say this, I'm starting to think about you like I do about Lucy - I should only buy on sale because it's not worth paying full price for sketchy quality. I've had three items unravel on me now and one shirt bleed on me. My luon items seem to be doing the best - no unraveling or bleeding but sometimes they pill a lot and sometimes they don't. It's very irritating because certain batches of the same product are fine so it becomes a crap shoot every time I buy something. Is this the good batch? Cross my fingers and hope so. I've read a few comments by educators on your facebook page where people will complain about a quality issue and you say it's an illusion that problems are more commonplace because people get the word out over the net. That's BS. There's a lot of people who have been buying Lululemon for years now and they've noticed a decline within their own collections. I have older items that have not pilled a lot and not unraveled. It's your newer stuff. Some people pin it on being made in China but that's not an excuse. My adidas stuff is made overseas and it's fine. It's your quality program. You need to ramp it back up. You built your reputation on your high quality. For the prices you charge, you need to fix the quality issues before people start seeking out other options.

Bring "Stitch" Over to the Women's Color Palette, Please!

I would love a top in this gorgeous blue color - L-O-V-E, LOVE!!!

It's not only pretty, it's made of running luon. This is the new men's running luon top, the Run Fuel long sleeve. I am so jealous!

Here is a silverescent shirt in Stitch - it's just as pretty:

By the way, Lululemon - why are the men still getting tops made of Silverescent and we're getting the rather ugly silverescent circle mesh? I much prefer silverescent.

What is up with your male model? I know I've commented before on his prominent nipples but this is running luon, not luxtreme. They really shouldn't show up so much in the running luon. You can't see nipples on the man in the top photo so what is this guy's deal? Is there some hanky panky going on during the photo shoot? Does he have the hots for the photographer? Do bodybuilder type dudes have their headlights on all the time?