Friday, September 7, 2012

2012 2nd Quarter Earnings Report Highlights

Nothing super earth -shattering in this call. Lulu did well again this quarter. Still pants are supposed to be coming back, possibly in a re-invented form. More showrooms will open in London. They think they've solved the bleeding problem.

[Day started out the call talking about the Sea Wheeze:] "Over 7,000 people joined us for a weekend of fun, including pre-run sunrise yoga, the 13-mile tour of our wonderful hometown city, complete with Cheer Stations at every community we ran through from dragons in Chinatown, tai chi at David Lam Park and the world's largest Cheer Station at lululemon's very first store on 4th Avenue...It is remarkable to think that a couple of back page ads in Runner's World, we could attract a sellout crowd to our first-ever run event. It is a reflection of our ongoing commitment to our communities, to the grassroots authentic relationships we have developed over time and to the deep connection and partnership that we enjoy with our guests. Our #1 priority is meeting our guests where they are at, and it was wonderful to see that they were equally willing to be excited and come celebrate with us here in Vancouver. To show how much the participants and the community enjoyed the event, for 2 hours that day, we were the top 5 of the top 10 trending topics in Vancouver, and this is while the Olympics were on."

[My commentary: The Sea Wheeze was pretty awesome and I definitely want to do it next year but I'll add a little reality check. There were only 5904 finishers of the race even though 7500 paid to race.  I was also told that 40% of the participants were lulu employees. That's ok. I think everyone who was there wanted to be there and had a great time but don't tell me the company didn't encourage their employees to participate.]

Some talk regarding quality issue and their letter to "guests" about their commitment to quality, see the highlighted paragraph towards the bottom.

 Q & A:

Q: (from analyst Jennifer Black, my personal favorite and the only one I think that actually buys/wears lulu.) I've heard that there's demand for larger sizes. I know you go up to a 12. And I know you phased out the Still Pant, which appeased some customers due to the looser fit. And I wondered what your thoughts were on extending your size ranges for both smaller and larger sizes.

A: It was such a mistake to ease out the Still Pant; we've heard that loud and clear. [Yay! I hope that means the Still crop and Still Short are coming back, too.] So the Still Pant will be coming back. And reinvented Still Pant will be coming back, Sheree is saying to me. So I think our guests can rest assured we've heard their feedback, and that will be back in the lineup. We are not planning on introducing larger sizes.

Q: I'm wondering if you can talk a little bit more about your core women's yoga business. It sounds like that -- those businesses are still very much positive comp-ing. And then if you could comment on U.S. versus Canadian comps and any transaction metrics you care to share, that would be great.

A: Boy, I'll tell you, we are just continuing to be so pleased at the response to that just basic core yoga business, and it also includes, obviously, the gym fitness studio.... And we still see, particularly in the States, it is a very technical athletic guest that is purchasing the product. [That definitely jives with my observation about where I spot lulu in the US - mostly at the gym or people who obviously came from or are going to the gym.] In Canada, because we have a more mature market state, you probably see a little bit more mix with that. 

Q: And what type of reads are you getting from the international consumer on your e-commerce platform?

A: London, we had both the showroom and we had an athlete's house during the Olympics. We had a lot of activity going on there. We do anticipate planning additional showrooms in the London market.

Q: I've noticed that the accessory and headwear and underwear components of the assortments seem to be increasing. I'm wondering how the -- how your success has been in these categories, 

A: The first half of the year, you saw us do more color, but probably not as much detailing and style innovation as we would really have liked to have done in the line. And you'll see that really coming out in the fall and winter drops that are just coming up. So it takes a while for that to get to the markets, so just to talk about those expectations. So yes, you did see more color coming through throughout the first half of the year and particularly into fall. [I've got to say I've really gotten into the bright and strong colors of the past few months. I marvel at how I was so into all the gray and black prints from the last couple of years and don't really reach for them much.] We've got some great color in the store right now.... [Teal is supposed to be one of the fall fashion colors. I wonder if lulu will be bringing back one of their teals.]

Accessories is a focus and our focus here is to create the most beautiful, functional products in this area. So I'm going to start with underwear first because underwear is an important part of the functional layering system. And we're looking at better construction technologies to have invisible undergarments that are completely non-chafing, wicking and so on and so forth. So that business is actually -- we're focusing on that in terms of technologies.[Hint - copy Zobha's Yoga Boyshort panties - they're the best]. And that's in both men's and women's, by the way. Headwear, we noted that there is an opportunity for share in caps and so on, and we continued to see women's headwear just outperform our plans. [Please bring back the Flight Running Bonnet. My four are getting worn out. Also, love, Love, LOVE the Bangbuster - best headband ever! Make one in every women's color you release.] So there's a lot of demand there for things that are functional and beautiful again. And in terms of bags, I don't know if you've seen our women's bags on the floor right now, but I think they're the best that we've ever done there. [Lulu gym bags are the best I've ever bought. Pockets galore. Just love them to pieces.] The details...

And we're also innovating in men's bags.[PS - My husband would like a smaller duffel to bring to the gym. He doesn't need one that could double as a weekend bag.]

Q: I was wondering if you can talk a little bit about the men's business.

A:  ...growth is slightly outpacing women's....there's a greater variety of fit in the bottoms [My husband would like to know why you have eliminated the 30" waist. He is driven to buy older style Run Response shorts on eBay these days.]

...For Q4, what we'll be seeing is we're capitalizing on some of the success that we had last year. So we'll be going into a category that's lightweight puffies, which we called "what the fluff?" And for men, it will be "fluff off." And yes, just thought I'd give you that little preview there. And we're also capitalizing on some of the warm wear business that we have with running luon and our tech fleece and so on and so forth. So those categories will be, you'll see, will be very strong.

Q: So just in the prepared comments, you quickly touched on that one product that bled. Can you talk about what actually happened there, how you were able to quickly adjust it, and why you view it as an isolated incident?

A :Primarily for us, it was the bright neons, which are very difficult to put on fabric, and we pushed the color limits pretty intently. So we did have bleeding with Paris Pink and a couple of small isolated issues, which were very hard for us to track down, in a couple of other colors that were also bright neons that came in the second quarter. So because we want to strategically continue to push the envelope with bright colors, we did bring in a color expert who's done an amazing job, and we've learned a lot of great new tricks from him, so we're actually very excited about even new capabilities. So the silver lining in having an issue with Paris Pink was that it created actually more opportunity for us. And so by changing some simple rinse agents [(TMI warning) I've got to say my latest Define Jackets in Power Purple, Pow Pink, and Bordeaux got a very sour odor in the armpit and I had to double wash and add vinegar to get it out. That has never happened to me before so not sure about the new process. It might keep the color but react weird with some people's chemistry. All the jackets were all lightly worn btw.] and a couple of other things that we've worked on with the manufacturers and the mills, we feel very comfortable now with the product and being able to do our strategic intent, which is push colors and maintain quality.

And what I'm so excited about in looking at the protos of the line that's coming in for holiday and beyond is we have some incredible outerwear layering system crossover pieces that will be really delivered for the holiday season, so these great running pants that can also be used for cross-country skiing. These -- Sheree mentioned the names, but if you saw the style and detailing behind the "what the fluff?" jackets and how they can be used for running, outerwear, things like cross-country skiing or active outerwear, just being out and about. These -- they're beautiful. They're incredible. The amount of transformability, which is what we always focus on, it's the best I've seen. 


Q: And then how you feel about your inventory levels for the lululemon e-commerce business. It seems like the assortment is somewhat limited versus where you might want to be in the stores.

A: our e-comm levels of inventory are great. We definitely see, as we've had more color, they're intended to drop for a week only. So if you don't -- or like 3 weeks only. If you don't buy pretty quickly, then you're not going to get them, and that's actually by design. So that's not an inventory level issue. That's a strategy, as part of our scarcity, so that we aren't putting everybody in the same outfit, that there is a limited availability of certain styles and colors. And that's our model. So those aren't inventory challenges. That's the model at work and working beautifully to sell the majority of our products at full price. And that's how our model works. So I wouldn't want to be -- I wouldn't call those inventory problems. That's brand strategy.

21 comments:

Anonymous said...

I can't read the yellow highlighted part at all:(

Pink Peony 4 said...

I'll have to tell my husband about this. He invests in LLL. I was warning him that he might lose some money because of QC issues but maybe not so much. I'm glad to hear they are confident in their platform. I like the scarcity model for the reason she gave that they don't want everybody in the same outfit. I REALLY LIKE THAT quite frankly. The true addicts won't miss out because of their vigilance and the others won't know what they missed out on. Works for me. Thanks LLA for the report.

LuluAddict said...

@ anon 6:08 am - Sorry - I didn't check to see how the mobile version of the blog looked. I changed the text to red so you should be able to see it now.

LuluAddict said...

@ Pink Peony 4 - The scarcity model is annoying but I've try not to get too worked up if I miss something. It actually kind of annoys me that I'd have to search out a strategic partner to find the Brodeaux Stripe CRB so now I want it less. I've been buying lululemon clothes for long enough that I've come to realize another cuter top, pant, whatever will eventually come along or I can always buy the item 6 months - 12 months down the line when someone else gets tired of it. The other way the scarcity model works in our favor is that it keeps resale of our used lululemon high.

Anonymous said...

Thanks for this. Happy to hear that the Still pant is coming back! (I know many people who will be delighted), and that winter weight outerwear/gear for running etc. is coming. Of course happy to hear that they are addressing QC issues.

Kathleen said...

I don't understand how "the color incident" was an isolated incident that was difficult to track down. The instances were frequently posted on this and other blogs, their Facebook and in product reviews. I had BLACK that rubbed off onto other items. That should never happen. Red-based colors usually experience some fading but black is supposed to be pretty set.

I still don't know if it was the other colors leeching the black or the black being poor quality dye, but either way I have totally changed to another brand of workout pants and am much happier.

While I applaud their honesty in this call, I wonder if perhaps they had no choice. It also discourages me as I feel that they may be bracing us for more.

Usually the clothing product cycle is a year from design to market introduction. If these were happening in Q2 and they fairly recently hired the new expert, that potentially gives us up to another 3 quarters of the same product quality.

As someone with a financial accounting background, I wish they would have to disclose their sales returns reserve... That would probably give us a solid understanding of the direction they really see their products going in. Interestingly, if I recall correctly, earnings were not as high as analysts had thought... One thing which can directly impact this despite increasing sales is an increase in the sales returns reserve.

Hopefully they get their act together soon. I feel like this spring and summer were pretty much throwaways and bought very little Lulu... I see more promise design-wise in the products that are dropping now. If they can get their fabrics back up to snuff, colors under control, stitching quality to be consistent and fit to actually be useful for sports performance... THEN I think we can start to see the old Lulu back. Until then, I will be crossing my fingers that the company is taking the internal steps neccessary to push product quality in the right direction.

I can't help but think they are still only touching on one aspect of many major product quality issues and not being realistic about the true extent of the problems.

Anonymous said...

re comment on brand strategy and inventory i understand what lulu is trying to do and this is true- we buy right away a lot of lulu things at full price because we think we might not get later it due to limited inventory. then next weeks comes with other things and we return things we bought before to free up money for some just released items. it would be good to know how much lulu those returns cost i think if they had a strategy similar to other popular brands to post on line monthly catalog so people can better decide what to buy based on budget allocation, both lulu and us would benefit from it. it will save lulu cost of returns and time for customer. this is my 5c on continuous improvement for cost and customer service at lulu

Anonymous said...

what are the thoughts on not extending the sizes?
I knew they would budge on that.
I hope its not cause they dont want their image change because of larger women wearing their clothes....

Thanks for the info! Youre always on top of it LLA! :)

Anonymous said...

The scarcity model is NOT working. LLL is hiding losses in expansion figures, but that cannot go on forever. LLL continuously fails to fully divulge their losses. There has been a lack of full disclosure from LLL in 2012. LLL has had their SEC filings called into question for each quarter so far this fiscal year. LLL is currently under SEC scrutiny. This is not haute couture. It's workout wear. Nothing will change that fact, not even the mindset of LLL's cult followers which includes some but not all customers. Scarcity models work only for the short term. Continuing to follow that model will doom LLL to ultimate failure as a company. Sell LLL stock now before losses can no longer be hidden among expansion figures.

Anonymous said...

@September 8, 2012 9:02 AM

Very well stated. I'm in complete agreement. Untruths abound with LLL, as does lack of full financial disclosure. CEO Day is on her way out, but not before she attempts to take LLL the company down with her. Ask Starbucks insiders about the skeletons in her closet. In time all the details will emerge.

Amanda said...

I wouldn't say the bleeding was isolated in the slightest. I returned approximately $210 (including sales taxes) in products this year, and I had never previously returned anything to lulu.

I am a little concerned about what lulu has resorted to for chemical treatments for their clothes to resolve the bleeding. I would like to see a little more openness from retailers/ manufacturers about the chemicals that are used in our clothing.

The scarcity model annoys me to no end... too much of it gets put on ebay with the price marked way up, so lulu and their customers both lose anyways.

If they did bring back a particular head band I would like to see the one that was about 2 inches wide in the front and gradually decreased to about 1 inch in the back. I know people love the bang busters... but those are way more head band than I need and usually a bit to big on me

Everything else was kind of in one ear out the other.

Anonymous said...

IMO lulu has bigger problem than size expansion to fix. they really need to fix sizing inconsistency in goods they are selling. does anyone tried the latest vest in red and pink? i bought the red vest in size 10, and thought to exchange for pink. when i tried pink size 10, it fits much smaller like size 6-8. sales person and i compared in shoulders part, and sure enough the difference in sizing was visible on the same style for different colors. the tags were size 10 on both vests. how is it possible? did they mixed up in production or downsized size to cut costs?

Anonymous said...

@ September 8, 2012 3:00 PM

It is definitely that they do not want their brand associated with larger customers. The Canadian side of the store always sells out of size 12 first, usually on the first day, and the next to sell out is pretty much always size 10. I am convinced they deliberately stock less of size 10/12 on the Canadian side because their product is used as casual wear here moreso than in the US. They do not want people to see their product on a lot of larger people (even though a size 12 is not terribly big especially if you're tall).

LuluAddict said...

Lots of the higher end athletic wear companies - Beyond Yoga, Splits 59, Nux, Zobha, Kira Grace, Margarita, Bia Brazil, etc. don't go above a 10 ro 12 so lululemon is not alone in staying to a smaller size range. As for not extending the range into a size 0, you can kind of already go there by buying Ivivva. I know a lot of size 4/6 ladies buy a few Ivivva items because lulu 6 = ivivva 14, lulu 4 = ivivva 12. I've heard the Ivivva "wunder unders" don't have gussets which can be a problem tops often work, particularly their version of the cool racerback. The lulu Calm SS tee is also available on the Ivivva site.

Anonymous said...

@anon 4:51- I agree! Sizing inconsistency between products is bad enough but lulu has had trouble with sizing WITHIN certain products that should only vary in color alone. I bought a BB in stride in my normal size 6 and it was way bigger than another size 6 I bought on the upload only one week earlier! I even put this jacket on top of an older in stride I have in a size 8 and the BB size 6 was actually even bigger than that at the hips. I was so angry, because thanks to lulu's stupid scarcity model I couldn't re-order it in a size or two smaller because it sold out by the time I got it in the mail. Foolish.

Anonymous said...

My husband also wishes they had men's size 30. He has to use the drawstrings to keep his shorts from slipping. And the small tight tights I bought him last Christmas were a tiny bit too big for his waist. He said my run inspires fit him better. Ugh!!

Sb said...

I think the scarcity model feeds into our addiction. You only 'collect' things that are rare. I know my collection of wunder unders are growing quite fast. They are my favorite pants from LLL. I probably have enough to wear for a month and not have to wash. So why do I need more? Because it's only going to be here for a short time and it will add to my collection. I think I need to attend LuLuAnonymous...

Anonymous said...

So, I was watching Food TV's "Extreme Chef" yesterday. It was a rerun for the run-up to this week's finale. First time I ever watched the show. What caught my eye INSTANTLY was the hot pink dye bleeding through one of the contestant's white chef jackets during a very sweaty episode in Thailand. Earlier commercials/previews showed her without her jacket: Lululemon CRB in Paris Pink. I laughed to myself because, no matter how badly Day would like the QC to be "isolated", there it is, on public TV!! Previews for the finale episode shows this same contestant (only female left; professional wind surfer out of Hawai'i) wearing, I think, one of the halter tanks in Paris Pink.

Anonymous said...

the scarcity model work very well. People tend to want things that are hard to find or hard to attain.

Yes it is frustrating, but if we knew that they were going to have that special CRB in every size and color we want, we would not wake up at 3AM on Tuesday to make sure we get it before it runs out. The other thing is that if they over produced at some point the stuff would end up in some outlet and it would be accessible to just about everyone which would take away the uniqueness of the product.

Anonymous said...

Dear All,

I'm brand new to this blog (which I LOVE btw--thank you so much for this!!)

But I am dying to know...what is a "strategic partner" and how do you buy Lulus on "resale"?? Any help would be so much appreciated, as I am a shrimp and size 2s sell out so fast :(

Thanks,
Veronique

LuluAddict said...

A strategic partner store is a yoga studio or spin studio or gym like Equinox that carries Lululemon. You can find a list of them on the lulu website.

"resale" refers to selling used lululemon clothes on eBay, Craigslist, kijiji, etc. You can also find new items there, too, as a number of people make a living selling marked down lululemon clothes