Friday, June 10, 2011

Q1 2011 Conference Call Excerpts - Part 2: Q&A

Q: I know there's been some questions raised around quality (from that 4th-rate analyst who downgraded the stock to pump her shorts)

A: [Day] Overall, what we can tell you is that our statistics for damage, returns, negative guest comments are down across the board and the lowest levels, thanks I think to a lot of the quality things that we put in place. I think some of the noise that we've heard a little bit is around luon, so I do want to point out that there is some variation in the fabric family of luon that I think causes a little bit of confusion. Our luon has been the same for over 7 years and we are maniacal about protecting that standard. [Ok, Christine, but lots of my black luon bottoms bought over four years have a different feel. I think you either: 1) tweak the recipe or 2) there are manufacturing tolerances, or 3) your third world manufacturers are cutting corners behind your back] But we also have innovation in luon, such as the luon light, the brushed luon. Last year we did a test with Silverescent and we also did a test with a higher-wicking luon that had a softer hand feel in the garment. And we do monitor the quality and feedback on those items in particular because we're always looking to push luon to the next level. So it's important we have that rate of innovation out there. But we haven't seen any increase in negative comments and the cost of that quality protection and the cost of the innovation are already in our model.

A: (re: new markets) we have showrooms in all of these markets, so we're making friends wherever we go and tracking it through e-Comm and able to see kind of what's happening in each of these markets, so we're really excited about what's happening across the U.S. [This is where the use of Angels works against those people who would like a store or showroom to open in their local area. The problem is that the website often gets things weeks later than local stores (where are the latest Power Dance tanks?). Once a photo of an item goes on Facebook and then to the blogs, people want it. Lulu has to get better about simultaneously sending things to the stores in both countries at the same time and then putting them on their website if they want a true representation of demand. People who use Angels are among the biggest fans and biggest spenders]

Q: (Is this analyst reading my blog?) Christine, on the cycling line that you mentioned, I know spin is kind of a category that seems to be gaining a lot of popularity [gaining?] among people who I would think are potential lulu customers. I guess I'm curious. In the past you've talked about it as a relatively small opportunity. I mean, are you thinking about it any differently? And how do you think about it relative to things like run that you've done in the past?

A: [Day] We see cycling as being another opportunity that's like that and you'll see us innovate on a broad thing from indoor spin to outdoors and test a bunch of things as we kind of hone that. But always what's most important for us is getting the technical features right first. So we believe in testing a product in to get that anchor product that we know people love, and then we grow the line from there. So we're not in a hurry to do it. It's testing it, getting the technical aspect of it right and then growing it, which is how you saw us grow the run line. [I'll test spin stuff for you, Christine. Honestly, lightweight breathable tops and slightly longer shorts than Reverse Grooves (bike length - 10" inseam and no padding) and you're good to go]

Q:  I was just hoping for an update on your showroom strategy. How many are open right now? And then how many do you plan to add over this year?

A: In terms of our showroom, we currently have 54 showrooms in operation. For this year, we're looking at potentially opening another 9 since we've opened, I believe, 4 already. But those numbers can change throughout the year as we see what's happening, so those aren't fully confirmed. In terms of the showroom strategy moving forward, we continue to innovate and look at what we want, what each market need us to do, whether it be a showroom or go right into a store.

Q: How many stores do you think you could open in a given year? Could you see that 30 accelerate in 2012 and 2013?

A: the 30 is our target for this year and that includes 25 lululemon stores. I mean that could change one or 2 either direction.

A: [Day]what does it take to get ready to open in a strong way? And I think that strong partnership that we have produces the results that you see and is a key part of our strategy. And so overlooking that, we also look at strategic sales, we look at online sales for market readiness. We have a lot of metrics, and we'll open the right number that we see the consumer demand.

Q:  if you could talk a little bit more about the cycling category, how early are we in the stage of SKU rollout? Is it in all stores? Is there other -- is there a lot of opportunities for this category? [Honestly, how intellectually lazy are analysts? Can't they do five minutes worth of research into how big a potential market is for a cycling line? How many spin studios are opening around the country or gyms adding spin class? How many bikes are being sold? My personal opinion is that Lululemon has a long way way to go before they rival Pearl Izumi or other major cycling brands. As for spin, is it growing? I don't really think so. You really don't need special clothes for spin because a lot of running gear or even hot yoga tops work for spin.]

A: Okay. So I'll start with cycling. And I think what -- we -- right now, we believe that run and yoga are still such big white space. And as I talked about earlier, we want to keep some innovation back for it to drive that future growth and we also don't want to be distracted from what we believe are the 2 biggest growth categories. So we view kind of testing our way into it. But we also do see it's a great white-space opportunity, just like really yoga was to do a lot around. So we'll continue to develop that, but in terms of being in a hurry to develop something or needing to develop it to drive sales, we're not in a hurry from that perspective and getting it right, getting the technical product and exploring is really what we're doing there and we'll continue to do for some time and -- so that when we are ready to go, we're ready to go there. [Let me give you my opinion on areas for growth. Develop more clothes that are geared towards women who want general exercise wear for the gym. Enough of the strappy, barely there tanks for ballerina types and work on tops that women don't have to worry about exposing a boob or showing too much cleavage. Something attractive but with sturdy straps like the Power Dance and Circuit Tank. Work on tops that accommodate large busts. Give us more tops that you can wear your own bra underneath. Fashion is really nice but function is key. Continue to work on light, breathable, wicking fabrics. Silverescent circle mesh, sheer luon, and luxtreme are all fabulous and where you kick your competition's ass.]

Q: I also was wondering if you could talk a little bit about ivivva. It sounds like you're starting to open more stores there. And I'm wondering about the viability of that concept for America and also, how big you envision that category could be.

A:  And for ivivva, we're really excited about the results that we're seeing in the ivivva model. We're already producing square foot -- sales per square foot numbers that are above the industry average in that concept. ... And we really feel like we've hit a great spot there with that dance, gymnastics and then the fitness line and skate being the big hitters...What you'll see us do is take it to online in Canada first. And then time permitting, we hope to get it online for the U.S. for the holiday season, but that still will be dependent on our resources to make that happen. And if not, then we'll launch it in spring of next year in the U.S., though we do anticipate we'll get a lot of demand, because we've already gotten a lot of calls about asking us when we're going to get that concept in. This year you'll see us open a couple of new stores. We've had some pop-up stores similar to the lululemon, but in its own unique way. We've done some test stores for that concept, so -- and those have been very well received, particularly in the Toronto market.

Q: And then if you could just give us an update on your men's business.

 A: We were definitely inventory light in the men's category. It's held its percentage of sales even through the growth. I think with men's, we're -- I still feel like we're going through a little bit of a transition. I think that the product quality, the color set and the focus has been right. But I think we're still looking. We feel like we've got a really strong line of shorts and bottoms and, I think, our signature tank, our tech tops. And I think what we're really finding in men's is what's our sweet spot, so that we can really grow that without it being an also-ran to somebody else or a distraction to us, so for our women's. And what's the right amount of space in the store for that? So I really feel like we still have a lot of room to grow in that category. The guests have loved the product and once they try it they're very loyal to the product. So I think that's still an evolving concept for us, but I know -- in my mind, we still haven't got that 100% right.

Q: And then in the new stores that you're opening, is the men's business doing better than the older stores? Or is it kind of performing at the corporate average?

A:Well, I think, you see a natural evolution the U.S. because the brand was introduced as the male -- female brand. You see it stronger there. [Interesting. Never knew men's was stronger in the US than Canada]

Q: And then ultimately the e-Commerce target, was it -- Christine, was it 15% over time or higher?

A: We said that's our midpoint and which we view as achievable in a couple of years. And then after that, with Chris and Sheree done designing what the product line for that is, we do see a large opportunity to do things, like extended outerwear season, that we can't do in our stores, that we can carry product lines a little bit longer. We can bring back the classics. I mean, there's so many things that we can do. Yes, and line extensions that we don't have the opportunity to do because of our size and our stores that also produce a healthy margin.

Q:  And then I was wondering if you, as it relates to e-Commerce, if you ever plan to fulfill the e-Commerce stores from in-store stock.

A: At this point in time, it's not a priority for us to be able to do that. We've got some other things that are ahead of that. And I think in order to do that, you also have to be very accurate with your inventory if we try to -- and we don't have any desire to ship from store. Do we see an opportunity to have some kind of handheld or terminal that we could satisfy the demand and ship from home in the stores in the future? That's definitely something that we're considering. And there's a lot to work out from that in terms of compensating store managers and keeping all of that in line that we have to solve. It's not just a technical issue, because we want to make sure we get it in a robust solution that satisfies all the concerns with doing something like that.

Q: And just my last question is, as it relates to the running products, can you tell what you are most excited about for Q2 and then for the second half?

A: Christine had mentioned that commuting is one of those and going into third quarter, we're actually looking at dropping a new commuting line.

Q: Christine, you just mentioned prints and brights. I think at least that's what you said -- comment on that in terms of the inventory. Do you think you have enough of that, as well the smaller sizes, the 2s and the 4s and also the accessories?

A: So we're also finding if we do things in color and print right now, that's also a really big driver of the product. [Uh yeah.Print is big. What did I tell you for the year and half it was gone?] So for prints and colors, I think we haven't had enough of those proportionately in the line in the first quarter and beginning in the second -- beginning of the second quarter. That increase is pretty dramatically in the end of back half of second quarter and the third quarter, fourth quarter. So we feel really good about where we are with that. I think we were a little light, I think, on prints and bright colors for the first quarter and that will something be that we address next year... On the size curve, we've improved. We don't have this big out-of-stock situation, but on the colored lines and the prints, we still see the 2, 4, 6s go faster and so we're constantly adjusting the amount of mix we have in that. That said, part of our strategy has always been that -- not to ever have enough of some those to keep the scarcity, to also have the guest be able to walk into a class and not be dressed in the same as someone else, which we believe fairly strongly in. So within the boundaries of that, we do expect those to turn at a faster rate, and -- but we should have something new behind it. And that's what we're working on, is to increase that.

Q: And then the pricing that you took in Q1 and sort of how you're viewing your opportunity to price up in the second half.

A: So what you'll see us do is some special edition hoodies or groove pants or jackets that might be priced higher than the norm. But we've been pretty selective about maintaining our price points.

Q: [from analyst Jennifer Black - she always has the best questions, probably because she wear the product] it seems like you're offering more product that can be worn for multiple purposes and that you have an offering of dresses. I wondered how big of an opportunity you feel this is?

A: We always and you see this in the spring, it's kind of a cover-up piece and kind of from that to-and-fro yoga collection that's part of our like fun element that we always have in there in the spring. So you see us do that then. But we don't see us driving what's more of what we call kind of a culture or a casual-wear piece as a main category for us. But have an element of fun and surprise and delight, that's why we do things like that, but not as what we see a major growth driver.

Q:  And then as far as your product categories, what do you see as being the largest opportunity for fall? And can you speak a little bit to outerwear as well?

A: Our technical tops is something that our guests cannot get enough of [because you've been slacking in that area. Stop coming out with so many crop designs and start coming out with more tanks. Where are the Push UR Limits lately? I probably buy 10-20 tanks for every crop I've bought.] and we've significantly increased our penetration there. In terms of outerwear, we have -- I think, what you'll see is some new styling and we're really pushing the boundaries more there [Great, more hideous Cocoon Wraps], and we're really excited about that. So I think you'll see more variety in that category.

Q1 2011 Conference Call Excerpts - Part 1: Opening Remarks

Christine Day: We are again very pleased with our start to fiscal year 2011. Given our inventory constraints, combined with our focus on transitioning our e-Commerce platform, we approached the plan for the first quarter conservatively. However, thanks to our strong partnerships with our manufacturers, we were able to source additional inventory for April and maximize the productivity of the inventory we had to work with, both in sales and gross profit dollars.

And although we had a few bumps in the road given the complexity of the e-Commerce project, for the most part we saw a relatively smooth transition to our platform, thanks in a big way to our new CIO Kathryn Henry and our e-Commerce team. It took a little longer than expected to merchandise our online catalog by about 2 weeks, but we are now to a point where our online store is matching our retail stores about as much as we want it to. Our online store inventory will be in a good position to support a strong back half of the year. So while we planned e-Commerce down as a percentage of revenue through the transition, we already see it climbing back towards a 10% run rate and expect to be close to 10% of total revenue for the full year.

Looking at the performance of our retail stores, they also performed as expected for the quarter. February was strong but inventory constraints held back sales in March and then April rebounded as we were able to chase inventory. Our same-store sales comparison of 16% drove our trailing-12-months average sales per square foot in comp stores to new highs, just over $1,800, up from $1,428 a year ago. We believe there is room for continued productivity increases as we build our inventory position, invest in our stores and our people, and execute our strategy.

Our second quarter product mix is still somewhat transitional, as chasing products for April had some impact on the optimal mix of products in stores today, but we are in a better position overall in Q2 than we were in Q1.

 Looking ahead, our richest opportunity is maximizing the size curves and seasonal allocation of product to our stores. We also continue to innovate our yoga and run lines, which are the major drivers of our sales growth.

We are in the fortunate position of being able to manage the rate of innovation and keep a strong pipeline ready for execution. New fabrics, construction and styling are how we continue to evolve our core lines. Our exploration into various new categories, such as our small cycling collection this summer, have received a strong response and is an example of a growth opportunity we can pursue in the future.

Christopher Ladd (Head of E-Commerce):

The transition by all accounts was an incredibly successful one [uh, ok] and I personally want to thank Kathryn Henry, our CIO, and all the teams across the company for making such a complex project a great success. We successfully mitigated the business risk and managed the guest experience in line with our expectations [must have been low expectations] while adding some key functionality like one-page check out, merchandising and search capabilities [you got rid of search by color], rich imagery enhancements and core-business-process stabilization.

Store Trip Report

I went to the store yesterday to return my Heathered Wren Clam Diggers and tried on a few of the new things. I tried on both of the new Deep Breath tanks. I love both of them but they are just not supportive enough for me. However, I might break down and get the Blurred Gray one since I love that color so much. I can always layer a Flow Y underneath.

The South Coast Plaza store is also one of the few stores (maybe only?) in our area to get the Heathered Deep Navy Sing Floss Travel jacket. It is really nice and would go great with jeans. I can see why this has become one of the hot SFT jackets to get. I don't really care for the longer length of the SFT (I sold my similar Wear With All jacket) but would love to see this color come out in a Scuba or, even better, Scuba Light. I would also love to see Still pants come out in a Heathered Deep Navy.

I tried on a few crops thinking I might trade in the Clam Diggers for another style and I took a long look at the Astro crops since I really want a shorter crop for summer. I don't have any Astros yet and I was very tempted to get the above pair but figured I'd be better off with a solid black so I held off since my store didn't have it in my size. I will definitely keep my eye out for new Astros, though. I like the shorter length and loose fit at the knee.

I visited the Irvine store today to bring in a couple of items to get some stitching reinforced and took a look around. Both the South Coast and Irvine stores have some decent sized markdown racks. Everything is at the first cut of markdowns. Both stores had some of the V-neck Swiftly tees in Tango marked down to $49, some Power Ys and Scoop Necks marked down to $39, some Mudra pants for $69, leftover white pullovers for $89 (I think), All Sport bras for $29, and various shorts and other things.