Thursday, December 12, 2013

Third Quarter Conference Call Excerpts

CFO Remarks:
"The third quarter went pretty much as we’d planned and guided. We started the quarter running at a low single digit comp rate, as delivery issues caused us to keep summer goods on our floors through August, when we normally would have set our fall product.
The black Luon never out program in bottoms drove sales in August and September, and particularly in our tight silhouettes in both solid and patterns, as our guests loved our technical, seamless fabric for yoga in both tops and bottoms. The quarter got progressively better, and October was the strongest month."

- will be opening their first European store in Covent Garden are of London in the latter part of the first quarter 2014

"Our pricing architecture has also improved over last holiday season, with a better assortment of gift giving items and key price point items, such as our Cozy Up style jackets in the $100 range. We also continue to get very positive feedback from our guests on the new Full On Luon, which is now available in all tight bottom styles."

"Having said this, we’ve experienced a soft start to the fourth quarter. "

"The late product deliveries that impacted Q3 have also continued, resulting in uneven product flow, and in some cases cancellation of purchase orders. We know that any lost sales incurred during the fourth quarter resulting from this increased focus on quality is a smart investment for the long term health of the business."

"In addition, we’re seeing a slowdown in traffic to our stores. Our best guess is that this is a result of a combination of causes. There’s a difficult macro retail backdrop, with all retailers experiencing lower traffic, but it would be na├»ve to think that the company specific issues that we’ve been dealing with this year, from the Luon setback to the recent negative PR issues, have not also had some impact. The combination of traffic and product issues resulted in a lower expectation for fourth quarter guidance." [He later also said the on line store was also impacting store traffic.]

Q: And can you give us the Canada and U.S. comps please? A:Canada was just slightly negative. I think it rounded to minus 1%. U.S. was high single digits positive.

A: [regarding luon mills]The second Luon supplier is fully onstream. We’re very pleased with the quality, and so they’re helping, both with quality and capacity. And we’re still on track to have a third Luon manufacturer onstream by spring of 2014.

Q:Wondering if you could maybe elaborate on or discuss further the PR issue impact that you had mentioned in your prepared remarks, and what you think you’re seeing from your store associates and the guests in the stores. 
A:I think any time there’s negative PR for a company, there’s an impact on the business. I’m not saying we can see a one to one correlation, but let’s face it, we’ve had lots of PR issues this year, whether it’s the Luon pullback or Christine’s resignation. And there is undoubtedly some impact on traffic, and therefore on the business.
Our job is to make sure that that’s a short term impact by earning back the trust of the guest, and that’s what we’re focused on, both in terms of quality and making sure we’re connected with our communities.

Q:And then I think you mentioned that October, in the third quarter, was the strongest month of the quarter, but it seems like you’ve seen a sharp slowdown since then to start the fourth quarter. Is there something specifically happening around that transition from October to November that’s going on in the business?
A:Not to get into weekly comps, November started somewhat slow. I think that might have been more product flow related. We saw actually a very strong Black Friday, Cyber Monday weekend, and then dipped down again after that. So, again, it’s really too early to diagnose trends, but that’s what we’ve seen.

Q:Just really quickly on the weak traffic trends, does the guidance contemplate kind of a step up in promotion, increase in marketing, or things to kind of offset these weak traffic trends that you might be seeing for the balance of the holiday?
A:No, it does not. There’s some increase in our inventory reserves to contemplate some level of additional markdowns, since we’re running a little bit behind, but not terribly significant, and no other strategic changes other than that. [I'm going to interpret this as keep the tags on things you've bought this holiday season to see if they get marked down. I did notice full size runs in a lot of "older" things in the store yesterday.]

QIn light of the PR issues, we were curious to know how you were measuring customer perception of the brand, and how you’re engaging with the customer beyond the apology video from last month.
A:We are conducting brand perception surveys, etc. It’s a little too early to talk about our conclusions from that. In the very near term, as I said, the two things that we need to do are ensure that only the best quality product gets to the floor, so that we don’t disappoint the guest, and reconnect with the guest.
And so for example we’ve instituted a program over the holiday called “No Humbug” where we’ve allocated funds to each store to just surprise and delight the guest in whatever creative way they want to. It’s not discounts, but just sending somebody home to visit their parents for Christmas, or whatever else they come up with. Just random acts of kindness, because that’s who we are, and just trying to connect with the communities again.

Q:I had a question on the nature of the current environment, with respect to the promotions in the marketplace. Is that something that’s impacting your business? And is there a view on how your merchandise margins may be in the fourth quarter?
A:Well, when I talk about the macro retail environment, it’s not just general traffic in the malls, but it is also how promotional is everybody else. And it is a promotional season, as it looks so far. And we’ve dealt with that before. We’re not promotional, but at some point, if everyone else is on sale, it does impact our performance, and that’s the environment that we’re living in this holiday season, as we have several other holiday seasons.
Of course, inventory levels, at the end of the fourth quarter, are going to depend on how the holiday season turns out. Again, we’re running a little below plan, so our inventory levels will likely be a little bit high, and we’ll be sending some product to the outlets.
In terms of composition, I guess the good thing is a lot of our heavy inventory is in our core styles, which we typically don’t mark down, and aren’t season-specific. So that will limit the amount of promotional activity.
In terms of freshness, again, holiday tends to be very different than what we’ll be looking at in Q1. As we said earlier, we’ve got some great seasonal styles that have resonated with guests, and have flown off the shelves, and we’re out of stock. When that’s the case, we would have love to have had more of those, but at the same time we don’t want to find ourselves overstocked in those items that are seasonal.

Q:Do you have any flexibility to become more strategically promotional in order to kind of offset what you’re seeing versus competitors? Or is there anything that can be done with respect to that, so that you can garner your fair share of traffic?
A:That gets to be a much longer conversation, but certainly we can be flexible as it comes to clearance and markdowns. Again, since a lot of our heavy inventory, as I said, is core, that may not be much of an issue. But you know, we have been creative in the past. We’ve done pop-up stores, we’ve done warehouse sales. We’ll do those again, and those should be adequate to, once again, clear the aged inventory.

Q [from Jennifer Black, my favorite analyst who wears and knows the products well]: I just have a couple of questions. We’ve noticed that some of your price points appear to be reaching new highs, and I wondered if you could talk about the customer’s response and do you feel you’ve pushed price points too high in this economy?
And then my second question is, have you considered a loyalty program with the incredible growth that you’ve experienced, to get the word out quicker to your most loyal customers on new products and product issues?

A: In terms of price points too high, you’re probably looking at some of the seasonal items, outerwear, where typically the price point is higher. We think we’ve hit a better balance this year. Remember, last year we had some of the What the Fluff and other outerwear styles had been, I think, priced too high, and we brought them down. That was more of an issue last year than what we’re seeing this year. And I don’t think we’ve pushed the price point beyond where our guest is comfortable, especially in those special items.
In terms of a loyalty program, that’s not in our near term strategy. Having said that, with digital and mobile becoming more and more important, I think our strategies to connect with the guest and let them know when new products are dropping, I think there’s lots of opportunities to improve our execution there in the future that may or may not look like a typically loyalty program. But definitely we’re looking at how we can evolve in that area.

Q:In terms of the slowdown in traffic, are you feeling it more in terms of new customer adoption, or is it existing customers that aren’t coming back to the brand? Just your sense in terms of who is seeking out the brand and who is not. And then also, if you could speak to any changes that you’re seeing in the competitive environment, particularly as more retailers enter the athletic and performance wear category.
A:I think it’s too early to have a diagnostic on that. We are finding, as I said, the seasonal items, the unique items, are selling. Typically that’s more our repeat customer, or guest, so that might indicate that she’s continuing to come back, selling less core. So that may indicate less new guests, but again, it’s really too early in the holiday season to do that diagnostic. [I assume the special items he is talking about are the herringbone and pique items.]

(re: the competition) As I’ve said repeatedly, there’s no one competitor that we’re looking at that’s opening stores that is having a particularly significant impact, but a crowded landscape, of course, makes it more difficult to stand out, and our focus has to be on making sure that our product offering is the best, and our in-store experience is the best, so we continue to stand out from that crowded field of competition.

Q:The product quality issues have been there since March, and if I heard you correctly earlier, it sounds like November was really the timeframe that you started to see a dislocation in the traffic trends into your stores. I’m wondering if you have any ideas or if you’ve received any feedback from your stores or guests on what the driver of that might be. Do you think there’s any causality between Chip’s interview and that fall off in traffic?
A: As I said before, whenever there’s negative PR, it’s reasonable to assume that there is an impact on the business. I wouldn’t say we have specific feedback from the stores that their lower traffic is related to either Chip’s comments or quality concerns. But I do think, as I said, it’s realistic to assume that when there’s negative press, that there’s an impact on the business. And I do think that’s impacted us in November and early December. And again, we’re focused on reversing that trend.

A (re: quality control): And the impact of quality controls, as I said, this is a journey. I feel great about the team we have in place and the progress we’re making. But the quality controls that we are evolving to are very much front end loaded. They’re having people and processes at the mills, as the fabric is being made, and then checks and balances as we go through the cut and sew process, etc. And at a minimum, improvements can only affect the seasons that are just now being planned.
In the meantime, as I said, we’re focusing on quality control at the back end, until those processes are affecting the current season. So quality control is very much focused on at the DC, making sure that product that’s already been delivered, if there are defects, that we’re not releasing that to the stores.
So, you know, at the store level, we’re dedicated to ensuring that you won’t see quality issues. But for some period of time, if those exist, they will be product not released to stores, as opposed to there were never issues from the outset. So again, as 2014 progresses, we’ll get progressively better, and by 2015… We’re not holding back on investment, etc., in hiring, and by 2015, we should be seeing a much, much smoother supply chain operation.


Lauren said...

OT - Has anyone tried the Moto Jacket? Any comments on whether you like it or not? What about fit? I am going to the closest lulu store to me (1 hr away) on Saturday to try out some new things. This jacket intrigues me because of the Sherpa Fleece :) Thanks!

Anonymous said...

Maybe it's just my cynicism, but does whomever is answering questions realize how dumb they sound?

Multiple PR nightmares are not solvable by "No Humbug" campaigns. My store has had out coffee or something lately but since they never offer it to anyone and leave it behind the register, I wouldn't know it was there if I hadn't known about "No Humbug". And, as awesome as I think it is that they might randomly send me to visit my parents who live a 15+ hour car ride away, I'd much prefer that the company take that lump sum of money and use it to afford me a discount or provide something more obvious that benefits all customers.

I also think that increased quality is great, but it's inconsistent at best. Here's to hoping the new CEO brings some out-of-the-box thinking to the table regarding PR and marketing.

That being said, I think the statement that all retailers are seeing a slow down in-store is true and correct. Bad news for them, but the freezing temps throughout much of N. America aren't helping. I know that I'm only leaving the house if absolutely necessary (work, groceries) and not making extra stops like I usually do during the holiday season.

Thanks for reporting this, LLA. It's always interesting!

Jenn said...

I agree.

This also explains why I went into one of my local stores today and found stuff that has been sold out online for weeks! I was absolutely thrilled to get the zinfandel speed tights i couldn't buy online because they were sold out in my size. If anyone is looking for something sold out online, check your local store!

Anonymous said...

also higher prices for essentials: food, health insurance, heating,etc. less money to circulate in the economy just based on those things, also lots of people out of work- things are going to get ugly in the coming next few years- they think profits are down now???? ha ha ha just wait!!!

Anonymous said...

Well, I can vouch for the "No Humbug" campaign. One of the stores in my city literally gave me a Brushed Forme Jacket (Raspberry). I tried it on, loved it, but decided to pass on it, as I need to spend my money on winter running clothes. I went to the register to pay for a pullover and tights when the Ed (who was helping me) approached me with the Forme jacket in hand. She said "here, we'd like you to have this jacket. It's our Christmas present to you". I couldn't believe it. I thought she was joking. Now, mind you, I've spent a crap load of money at the store, and online, but they didn't have to do that. I've never, ever had a retailer do that before. Made my day. I left the store thinking Lulu is trying to make things right with their customers and I need to give them a chance, cut them some slack. Yes, the company went off the rails and was pretty mismanaged for a lot longer than most in the media know (why the media thinks Lulu's problems just started in 2013 is beyond me; they're clueless). However, they're clearly trying to put the pieces back together. I think we need to give them a chance and ease up a bit.

Anonymous said...

Interesting read. Thanks for posting, LLA!

Anonymous said...

Wow, I'm shocked that more people aren't commenting on this. LLA- thank you VERY much for posting- I find this behind the scenes stuff fascinating. The thing that I like about this is that they have having a down year, and they understand WHY. The quality isn't there, the customer service is spotty, the PR nightmares.....they seem to understand that all of these are leading to a downturn in sales. Hopefully the pieces that are languishing at the stores are the pieces we collectively agreed were ugly or poorly constructed. That would be an impactful statement. So, although many of us are still buying, their revenue is down. I know that I am buying much, much less, and have turned to other brands such as Splits 59, Athleta and Sweaty Betty this year. It seems that I am not the only one. This transcript gives me hope that LLL is admitting that they have some problems, and now they can fix them. I was so frustrated that they were always pretending that things were all hunky-dory, because how can you do better if you don't admit that there's better to be had? Maybe 2014 will be a better year.
So, thank you again LLA for posting.

LuluAddict said...

@ anon 4:49 pm - Wow! I wish I would get a free jacket. Nice gift!

LuluAddict said...

@ anon 4:49 pm - OMG, the media and their clueless make me nuts. We started bitching about failing quality probably 2011 and I could tell some luon was off in 2010 and it got so bad in 2012. I mean check out my end of year post in December where I summed up the Good, The Bad, and the Ugly:

It's actually much better now. I was just re-reading that post. I haven't had to screen photos for CT in MONTHS now and it was an epidemic in 2012. Nothing has bled in awhile. They brought back full weight luon Power Ys and Scoop Neck tanks. If only they'd bring back the old Scuba design and the heavier weight french terry they'd be in good shape.

LuluAddict said...

@ anon 7:27 pm - Ugh, one thing I hate is where they say they were understaffed on quality and that is why everything got so bad - is partially BS. Yes, they were understaffed but if you think the designers were not given instructions to make designs cheaper to produce you are dreaming. It wasn't a rogue supplier deciding to change from a diamond gusset to the cheaper-to-produce triangle ones. That came from the top. And also making stitching less robust - less stitching per inch on hems, cheaper thread used = more unraveling. Thinner and thinner luon. I'm sure it was all by design - specifications were relaxed, i.e., made less stringent/robust. When Pantsgate came out and Day threw their luon supplier under the bus and blamed them, they came right back and said we made the fabric to THEIR specs. And, look at new Full On luon. It's pretty thick these days. The weave may not be so great for sheerness in a deep squat but there is no more CT. So, they knew exactly what they were doing. And I blame Day ALL THE WAY. I hate that Wall Street loves her so much. She tanked them and it's going to take years to recover.