Lululemon Athletica Inc. (NASDAQ:LULU)
2013 William Blair & Company Growth Stock Conference
June 13, 2013 11:00 am ET
Christine Day - Chief Executive Officer
John E. Currie - Chief Financial Officer
Brooke Johnson - Chicago Regional Manager
Stacy Greanias - Bucktown Store Manager
Sarah Levine - 900 North Michigan Avenue, Chicago Store Manager
Diane Patterson - Northbrook Store Manager
Sharon M. Zackfia - William Blair & Company, L.L.C.
Sharon M. Zackfia - William Blair & Company, L.L.C.
Okay, so we're going to go ahead and get started. I'm Sharon Zackfia with William Blair and I'm happy to have with us today from lululemon, Christine Day, CEO; and John Currie, CFO. Founded in 1998, lulu has expanded its store base to more than 200 stores across the United States, Canada, Australia and New Zealand. In tandem with the rapidly growing e-commerce business, lulu's sales per square foot reached a remarkable $2,058 last year and the Company's overall revenue has increased more than five-fold over the past five years while net income has risen more than eight-fold and the Company's fully taxed ROIC stands at an impressive 37%, all while continuing to invest for future growth. I need to disclose that I am a shareholder of lululemon and I also want to say on a personal and professional note that we will all be sad to see Christine go.
Thank you, Sharon. Okay, so today what I'd like to take you through is why I believe lululemon is in great shape and it will survive my departure. More than survive my departure, it will thrive. Now I would point you back a little bit in time to when Rose Marie left Burberry, a similar reaction happened in the marketplace, but then Angela came in and even did bigger and brighter, greater things with the brand, and I believe that will be the case for lululemon. And part of that transition occurred because Rose Marie had done such a great job of building a great business model, laying out a vision, laying out a plan, and having great people, but Angela was able to build from that base, and I believe the same thing is true for lululemon.
So we have our four pillars and we have a culture of vision and goal setting and it's very deep in our organization. Strategically what we are up to is create the market and change the way people dress, so really embed the technical athletic market with function and fashion, as we've been doing. Standing in the Starbucks store today getting my coffee was kind of a nice snitch of my past and present. I saw at least 20 people come in dressed head to toe in lululemon and I think we're making that difference in the world today. Transform the guests' shop experience with stores at the heart, and I'm going to talk about that a little bit, share the love of yoga one community at a time, be authentic, build healthy communities and leaders in the world, and we're going to share today our culture of leadership and expand our global reach, and John will talk to some of those points.
First, it comes down to people, and if I have any legacy in the Company, I would say that I am most proud of the seeds that I have planted for our culture of leadership, for the way that we engage and teach people inside the company. We have over 70% of our people are internally promoted and they know and understand and live the lululemon culture. If any of you have the chance to attend our BeyondLuon, which is an event that we do that shows how our culture of leadership changes people's lives inside lululemon, you would see that I am not the culture of lululemon, everyone is the culture of lululemon.
And I also want to say, it's a little bit – I think there's been a lot of concern in the marketplace with some of the open positions, and I want to give a little comfort to that. For the SVP of Logistics, we're down to the final two candidates and the person they report to is still there and has a good relationship with both candidates. I'm very confident that we'll close that shortly. We also have a person acting as the SVP of Product Operations and so I don't expect any disruption with that but we have one other internal candidate and one strong external. So, I feel very confident that both of those roles will be closed. And we are about halfway through the selection process for the EVP of Design and I've seen some great candidates with the ones I've seen so far, any of which actually I do believe could be a CEO.
And in addition, the Board has formed the search committee, they are going to search, they have selected a search firm. So for everybody who is still sending in notices that they would like to be the search firm, sorry, that's closed, and are committed to finding another great CEO. And what I would say about the Board is they took a chance on me. I was a first-time CEO but they saw the qualities in me that have created the last five years and I am confident that they will see the qualities in the next person to deliver the next five and ten years.
Product; in our stores and e-commerce business, what we've laid the foundation for over the next three years is we've begun the transition to integrate our e-commerce and our stores into one kind of more geographic, localized buying model, and so that will continue our scarcity and continue our full price sales model. We sell over 88% of our products at full price and that's one of the things that leads to a very healthy margin, but what it's going to take in the future is being right in Halifax at the right season with the right product and being right in Florida with the right product. And so we've been laying the product stream and the workout to be able to do that, and with e-commerce starting to be the big store, so that the – for instance if we put in crops in Florida and we have to keep pants in Halifax, the crops and the pants would be online and people can buy and get whatever they want.
We'll also be stepping into using technology that people can order from the stores, handheld technologies, and you'll see those things rolling out over the next 6 to 12 months. So it's very guest centric model based on localized geography and buys that allows us to continue both the scarcity model and full price comps driving our store productivity in the future. We've also laid out our Om app which is very important to continue to build the yoga community and support everything that we're doing.
Some of the product lines that we did recently like the Swim Capsule was very well received. It sold out so quickly that we are actually bringing it back in December and we'll bring it back I think four times next year, and that will live online for a longer period. So that's how we're using the online stores and our Capsule program to continue to build the product line and not be constrained by a 3,000 square foot store.
Yoga is at our core and this is where the Om app is really important to us because it's about being authentic in the yoga communities. We've always viewed ourselves as the cooperative arm to our yoga communities. So the Om Finder really supports our ambassadors and showing classes everywhere in the world, so you can be in Dubai or Hong Kong and you'll be able to see where our ambassadors and yoga studios are globally. So as more people that go to the classes, the healthier communities are and the more people there are participating in the lululemon lifestyle that we have the opportunity to clothe. But most important than that is helping these small entrepreneurs in many cases build their businesses, and that's what's all the work in our stores. When people come in and attend classes there, it's not to sell the product per se, that happens as a later stage, it's actually about building their businesses and the opportunity for them to acquire clients.
Men's is the other most significant opportunity. We are really pleased with the men's drops that began about three, four weeks ago. It's been over-achieving its plan and the men's penetration is growing. We've had the best response to the product that we've ever seen.
We've also begun connecting with yoga and sport, and so what we do is we bring yoga training through our ambassadors to a lot of sport. Almost every hockey team, a lot of football teams, it's now in baseball, we see it in golf, we are asked to provide ambassadors to many of the professional sports teams. And so we've connected them as part of that training program and we see naturally then yoga in men which is one part of the niche but just technical athletic wear and we'll move into categories of technical street, which for us that means it's hidden sweat, that you can do an activity, it looks like you're wearing a garment that you didn't have to and that you show up without having sweat. So for instance a jacket or a pant if you commute or cycle or run to work, that you would be able to show up and the sweat – you would be very comfortable wearing the same outfit for the rest of the day. So when we talk about technical street, it is still an athletic and technical garment, not just bringing fashion into lululemon.
We do see ourselves probably by 2016 having standalone men's stores and so Felix Del Toro who was brought in, he has come out of his training program and took the helm of the men's product team this last week and he is now laying the groundwork, not only for the growth over the next few years but for that having a separate extended men's stores on that timeline.
Stores and community; as you know, we allow our stores to actually be their own marketing arm in their communities, and this is a really important part of lululemon, and we are very competitive but we also want everybody to win. So this was a Baltimore store and when Under Armour opened across the street from us, (indiscernible) as you know, [protect the house, as Under Armour's saying] (ph), and for us it's about friendly competition and encouraging ourselves to be better than the competition, not afraid of the competition.
We also in community, I think you'll see some stores that have said 'CEO wanted' in their windows today, so we like to have a sense of humor, and a few other stores said 'free hugs with purchase today'. So, I want you to know that while they are just made obviously that I'm leaving, also for them it's business as usual and because they do see that the business is performing well, the luon issue is behind us and the guests are loving the new luon that's in the stores right now. It's been very well received, it's driving sales, the business and the morale and what we're doing inside does not feel honestly like it feels to you right now. And I want to give you that assurance that morale is high, that we are connected, and the reality is, I'm coming back to work on Monday and I'm there until the next CEO is in place. So it is business as usual for us at lululemon.
We also have the SeaWheeze. Last year we had 7,400 people participate, this year we have 10,000 people coming in. There is a training app that we have worked on that's out in the marketplace that a lot of people have downloaded from the app store. We sold out in 30 days the 10,000 slots, it's highly coveted. I saw a few people on Craigslist advertising for slots in the SeaWheeze, so obviously it's still a very coveted event, and for us this is about welcoming people to our hometown in Vancouver and showing them usually the hometown ethos of lululemon, the West Coast, what's special, and we do plan on keeping our headquarters in Vancouver. I think there was some speculation or concern because we delisted from the Toronto Stock Exchange that we were moving, I just want to say we are not. Vancouver is our hometown and we will stay there. I will be running the SeaWheeze and consider it a party for me, so all 10,000.
Wanderlust is also very important. We partnered with them to do really yoga events around the country and North America and actually internationally. What's important about how we participate with Wanderlust isn't just sponsorship, we actually pay for our ambassadors and our educators to go. So it's actually about inviting people to participate and creating great experiences for our ambassadors and we have a great one coming up in Whistler.
And I'm going to turn it over to John.
John E. Currie
Thanks Christine. So, Monday after the market closed, we reported our Q1 earnings and updated our guidance for the year. We actually felt pretty good about our results but apparently none of you noticed this, or cared or something. So I won't dwell on it. For the second quarter, this would be the quarter where the biggest impact of the luon shortage will be reflected in our revenue, but even with that, we're giving guidance of revenue of up to 22% increase year-over-year, and for the full year increased revenue of 20% to 21%. Again, even with the write-off on the luon that we took in, in the first quarter, diluted EPS for the year to $1.96 to $2.01.
So even though the biggest impact on our margins was the write-off on the luon that we took in Q1, there is some residual impact from that situation that's impacting our margin profile for Q2 in particular. Since our black luon pants are our core items and those are the items that we have the highest margin, the mix shift will result in slight compression in the gross margin.
In addition, as you've seen, we've really done a great job of getting back into stocking some of these styles earlier than we originally thought, but to do that there's air freight and other costs that we are going to incur. We are back in stock to some extent now but that will ramp up for the balance of Q2. So as I said Q2 revenue will be impacted but expect to be fully back in stock by the end of the quarter.
In addition, as we've discussed, we're making a much heavier investment on an ongoing basis in our quality, our testing, our factory oversight and in our product development. So that's going to start showing in gross margin in this quarter and will be an ongoing investment that we'll have in our cost structure. In addition, obviously not related to luon, but the Canadian and Australian dollars are both materially lower than they were a year ago, so that results in some gross margin compression in our sales in those countries.
In terms of SG&A, we are continuing to leverage the fixed cost in our SG&A but that is deliberately offset by the investments that we are making to build for the future, both in terms of continuing to build the foundation to support strong growth long-term, a lot of that is in terms of IT systems and we have a very robust IT roadmap, and then building out the management teams and other infrastructure required for international growth, again spending this year that will benefit us in terms of higher revenue growth for several years to come. So even with the luon impact this year, which dropped our revenue, estimated $45 million to $50 million, approximately $0.21 a share EPS, 2013 as forecast, caps off a five-year pretty impressive growth rate, 36% compounded annual growth rate in revenue and translated with a strong flow-through to 48% compounded annual growth rate in EPS.
Now we've got lots of drivers to continue that growth. The biggest opportunity of course is still North America. In the U.S., we're only about halfway built out in our target of 300 stores and we're adding in the U.S. lululemon stores of about 35 to 40 per year. In addition, we are having some ivivva stores and some stores in Australia. Those new stores come into the comp base at about $1,100 to $1,200 per square foot, which is strong productivity but obviously a lot less than the average of our comp base. The reason for that is we don't do mass advertising, it's all grassroots marketing, and what happens as we've seen for several years, the stores come in at that level and then they comp very strongly until they catch up to the comp base. So that's going to drive strong comps in the U.S. markets for several years to come. In Q1 for example, in spite of all the noise, in spite of the lack of some of the luon product, the U.S. store base comped about 16%, and so that's expected to continue.
In addition of course our e-commerce business is still only four years old. It's running at just under 16% of our total revenue and really gaining momentum. We've got a great team, we've got great initiatives, and we see that growing to 20% and beyond. In addition, driving that North American comp, couple of things to call out, ivivva, our concept for younger girls, it's now delivering over $800 a square foot. I think we've really kind of nailed the model for that and you'll see us accelerating store growth for ivivva next year. And then of course international, we expect that the international opportunity overall is as big as the North American opportunity.
So over the past couple of years, we've been really behind the scenes building the foundation for that international growth in terms of setting up distribution systems and logistics and financial systems that can support the complexity of an international operation and what you're seeing this year is the next stage of our gradual international expansion being opening more showrooms. So, as we've said, we're going to open up to 15 showrooms in international markets this year, treating those markets the same way we successfully have in the U.S., with showrooms and e-commerce, and when those aspects of the business have created enough brand awareness, we move to stores. So this year, we have our two showrooms in Hong Kong, we've recently opened one in Singapore, that's blowing the doors off, we've now got three in London, and our first in Germany and Berlin, and with those seeds planted, we expect to be moving forward with our first stores both in Asia and in Europe by 2014.
With that, I'll turn it back to you.
Thanks John. So what we want to close on is we've invited, like we usually do, four amazing people from our lululemon team. So we have Brooke Johnson who is our Chicago Regional Manager, we have Stacy Greanias, our Bucktown Store Manager, Sarah Levine is our 900 North Store Manager, and Diane Patterson who is our Northbrook Store Manager, and I don't think there's any better way to show you what my leadership has meant to the Company than to show you how our people lead. So they're going to tell you some stories about the business and their leadership so that you can see that the leadership is everywhere inside the Company. Go ahead, Brooke.
Hello. So as Christine mentioned, at lululemon we're all about setting goals. You guys can walk into any of our Chicago stores and you'll see our team's personal health and career goals posted loud and proud in all of our stores. And we also manage and lead through our vision and goals and we realize there is no more important time to do so than during times of adversities (indiscernible).
We're in the business at lululemon of making the world's best black stretchy pants, and then in one day in March we didn't have any. So as any good goal setter does, we focused on the controllables. What could we create within the stores that would provide an incredible guest experience for our guests and also for our teams? So here's what we focused on. Guest experience was first and foremost. We had guests flooding in our stores, coming up to us in yoga classes, bringing inquiry about our product. [Money returns and exchanges] (ph), we had men coming into our stores wanting to buy the (indiscernible) pants. We didn't ask and we didn't sell it to them, but making the guest happy and comfortable was key, and education was paramount to make sure that we found a great alternative.
We came out with an acronym, a company doesn't make a good acronym, called 'where it's available now'. So on our floors, we embraced color like never before. We donned shorts. We embraced the run line and we realized do you really need black stretchy pants when we had some of the other great alternatives, as we spoke to community at our heart of our company, and so we knew that we had to go straight to our ambassadors in Chicago and our local instructors. We wanted to ensure that we instil trust through open dialog and full transparency.
And then for me it was all about managing through perspective, because we know that mistakes and misses happen, but the important part is the action and the learnings and the attitude that we have within us. So we kept our sense of humor. We started our store manager meetings with the fabulous Jimmy Kimmel sketch, I don't know if you guys have seen it, but check it out. We put decals in our windows that said things like, 'we're sincerely sorry'. Another one was, 'we're here to cover your ass not ours'. As you guys know, we became a pun magnet. And through focusing on these goals and these actions, we realized that it's simply business as usual, (indiscernible) to run a kickass business. We have a commitment to amazing products and simply standing behind doing the right thing.
We had some rough things happened in Q1 and I can tell you in Chicago, we are loving Q2. Black is back, please come into our stores and we reminded ourselves of the manifesto quote that life is full of setbacks and success is determined by how we handle them. Thank you.
So I would first mention stores of goal setting, goal setters that was kickass in their business, I'm one of those store managers. My name is Stacy Greanias and I'm currently at the Bucktown Store here in Chicago. I've been in a store manager role for lululemon for over six years, longer than Christine's been with us actually, and the reason that I remain in my role and that I choose and love my position as a store manager at lululemon is because of vision and goals, because of the core values of this Company, and the opportunities that it's provided for my own leadership. So, what's kept me in my role is being an entrepreneur, being able to own my business, to be a leader not only for my people, for my guests, for my community, as well as for my peers.
So I'm going to share with you some of the goals that I'm currently up to within my role. So 2013, what does it look like in my leadership? I've had these some amazing opportunities coming my way. I've been selected to be part of a special training program that's going to be helping support the store leadership and new retail training for the opening of our new store locations as well as new store managers moving into their role. So I get to share with them all of the mistakes and learnings and fumbles that I had along my journey that has made me an expert within my role today. As well, Christine spoke to the SeaWheeze, half marathon race that we're going to be hosting in August up in Vancouver.
That's right, Christine's party, it's going to be a really, really great time and myself and a Canadian store manager have been selected to create, run, operate, sell out everything that we have at our pop-up SeaWheeze store location that will have exclusive apparel designs for the race. So that's really going to take my leadership to a whole new level being able to innovate, be an entrepreneur, and have some crazy days of business happening up in Vancouver.
Along the way, I'll also continue to be going forward with my health goals, is to run a half marathon every month for 24 months. So I finished number 16 last Saturday here in Chicago and I'm hopeful that SeaWheeze will lend me for number 18 as well. So it's really about that integration of my goals, my core values, they are so aligned and so a part of lululemon and this Company. And now Diane is going to speak next for you.
Good morning. I'm feeling a little underdressed for this room. I normally don't go to work with suits.
You're overdressed, yes, that's right.
My name is Diane Patterson and I've been a goal setter my whole life, but what lululemon has truly taught me about goal setting and what has elevated my goal setting to the next level is the idea of living your goals out loud. Success doesn't happen in a vacuum and neither does the achievement of your goals. I learned that about 18 months ago. I was a fairly new store manager, I was running one of the smaller stores, and while I was happy in my role and I was happy with my store, I realized that truly for me what lit me up inside was the thought of running a high-volume store, and that for me was the sweet spot. So, I set the goal and I quietly wrote it down on my goal sheet which I quietly set into a frame which I quietly placed on the floor of my store, and that was about it.
Four months into having set this new goal for myself, I realized that I wasn't really making any headway on it and it was because I hadn't done anything with it. I hadn't spoken about it really to anyone. I had maybe sort of quietly mentioned it to my regional manager at the time and sort of said something off the cuff to one or two of my educators, but I really hadn't boldly and bravely stated it out loud for people to hear and for the network of people who can really help me achieve that goal for them to hear that and support me in that goal.
So what you do next? What I did was I went to the next regional meeting and I sat in a circle with nine other store managers and my new regional manager at the time, Brooke Johnson, and I said I'm going to be a high-inventory, high-volume store manager. I don't know what that looks like, I don't know where that's going to be, I'm not exactly sure how that's going to happen, but it's what I'm committed to 110% and it's what I'm driving towards every day. Six months later, I went from running the smallest store in the region to one of the top two, and I know without a shadow of a doubt that that would not have been possible if I hadn't stated that goal out loud that day in that circle of people and really been brave enough to do it out loud.
What I coach my team on and what I'd like to share with you today is start with a dream, chase it into a measurable goal, put a specific timeline on it, write it down, and then be bold enough and brave enough to turn up the volume, because if you're not living your goals out loud, you're not really living them at all. Thank you.
Good morning. My name is Sarah Levine. I was hired with the Company in early 2010. It took me all the way up in Santa Monica and back to Chicago again and I currently manage the store in this building actually, the 900 North Michigan Avenue building, so nobody has any excuses not to stop and buy today.
So today I want to talk to you guys about grit. I am always in search of learning about and coaching around what makes people successful. I was recently listening to a TED Talk and – you guys should listen to TED Talks, definitely do – and the subject was about grit and how it was a key factor in achieving your goals and having success. The speaker said, grit is passion and perseverance for achieving your goals. It's living life like it's a marathon and not a sprint.
I believe at lululemon we talk a lot about leveraging people's strengths but I would argue that even if you put the right person on the right seat of the bus or you set someone up with the right role to match their strengths, that success is not necessarily inevitable. So why? Because talent doesn't help you achieve your goals, it's not the determining factor in that. Grit is what helps you persevere to achieve your goals and find your own personal success.
So I ran this idea of grit on my dad, because he's the guy that I think has found a lot of success in his life, and he recalled losing his dad at the age of 16 to a growing battle with cancer, and he said, I remember a family shifted at me, and he said, I turned to my mom at one point and said I won't let this consume me and I won't let this moment defeat me. And he said, so I'm not saying I'm glad my dad died, he said I'm not, and I even think that 50 years later he still misses him, but he said that moment shaped me and it's why my dad found himself as the full provider for his home and a landlord and high school student at the age of 16. This moment made him gritty. So tragedy can cultivate grittiness in all of us. But how do I cultivate it as a leader at lululemon and how can I fill my team with gritty people, goal setters, goal achievers, and goal failures?
So, it doesn't take grit to set goals but it certainly takes grit to be in action around them. So action can look like what Stacy is up to. So 24 half marathons, it can be completing an Iron Man, it could be surfing the North Shore in Maui, I mean it can look absolutely incredible. But what action can sometimes look like is working three jobs, putting yourself out there on Match.com, or cutting out your daily Starbucks, which for me will probably never happen.
In my leadership at lululemon, I have watched, I have supported in formatting first resumes, I've been a sounding board for our vision and mission statement, I have attended a really bizarre musical in a haunted house at a tiny theater in Los Angeles, and I have done updates on savings accounts balances. And in that process, I've watched people feel bored, uncomfortable, unglamorous and broke, but what it shaped is a key leader at lululemon who will no doubt be a store manager of this Company, it has shaped a founder of a 501(c)(3), a working actress in Los Angeles who is absolutely fabulous, and a first-time homeowner.
So this is what action looks like. So, the process to achieve the goals was ugly at times but they stand today as grittier people. So as a leader, what I can do is create a space where people live their lives like a marathon, where they create powerful visions for themselves, achieve powerful goals, and take this countless steps to achieve those, where they embrace the short-term failure because they know in the long run it will lead to the success of their long-term goals.
Sharon M. Zackfia - William Blair & Company, L.L.C.
Okay, so we're out of time and we're going to ask to please not to try to corner management just out of the [breakout] (ph).
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!