Thursday, September 1, 2016

Lululemon Q2 2016 Notes.

These are my notes so far from the earnings call. I may add more to this tonight but for now I've just spent three hours listening to the call, taking notes, reading the transcript, finding the informative links for within this post, making sense  of it all, reading between the jargon and constantly googling how to spell 'silhouette'. Please bear with me. I hope to have more notes tomorrow from a more informed reader. I am not an investor nor have I any qualified analytic knowledge about lululemon earnings information, this is just my takeaway from the earnings call and the question and answers as a customer and fan of the brand. Do note again as I mentioned before that Lululemon has opted to do the webcast at 4:30 EST on a Thursday of a long holiday weekend (in my opinion, strategically getting ahead of media attention) Lululemon has never before had earnings calls this late, and this is also the first time they didn't provide playback options immediately. The playback of the call was made available late this evening. 

**Since launching the website they are enhancing customer experience. The new website launch allows them to do A/B testing with customers (showing different versions to different customers and analyzing response). They have a robust database that 50% of customers are currently enrolled in, allowing them to analyze guest behaviour and create greater engagement. They are working on reducing all friction from customer experience (really? removing floating product images with modelled product images for thumbnails I guess). They are looking at website product stages, checkout response, checkout processes (abandoning items in carts and not checking out) new ship from store option (vs. from warehouses) currently in 11 stores and will be in 65 stores by the holidays. This allows them to sell through product assortments at full price vs. having to create markdowns to move inventory since they will be gathering inventory for shipping to customers from stores and warehouse.They have sitched weekly emails which where formerly product focused to being more event focused. They are creating a more agile and nimble system where they can create change immediately. with the new website they are able to see within a few hours how product pages are doing. (they are obsessed with conversion rates and analytics). Also worth noting in the database and analytics information is that stores are now providing free wifi access.

** Later in the year we will have a Black Friday collaboration with Janaina Milheiro, known as 'feather girl' She is a textile designer from Paris who works regularly with couture houses. We can expect to see the artistry of her feather designs with technical silhouettes with new fabrics to create digitally engineered prints.

**stores opening with smaller footprints 'hyper-local'. They will be opening smaller scale stores which are community dedicated. Mountain resorts, beach resorts with a specialized product assortments. strictly run products for run communities, men's only stores etc. etc.

**NULU is being released this September and is Lululemon's first naked sensation cardio pant. Sweat wicking, quick drying, lightweight coverage and gentle compression engineered to minimize distractions. It's specifically engineered for indoor workouts such as spin. Raising the bar on craftsmanship and dialing up visual impact of prints and colors and details utilizing  highly technical processes that allows us to achieve a rich level of color and detail without sacrificing function. They are 'coming back' to being design focused and working on fit, layering and outfitting. Laurent emphasized several times the 'outfitting' theme and the guests ability to create outfits with the new designs. I believe this to mean the focus on black/white textural bottoms. Currently they have a ratio of 1.2 to 1.3 on tops and bottoms and they hope to increase that ratio to 1.5.

**The shop-in-shop store they opened in Harrods in August is doing very well and they plan to open a new massive 82,000 square foot store in St. Regent (London) in Q4, which sees 7 1/2 million visitors each year. This store will have a special limited edition collaboration line with Central St. Martins fashion students and it will be exclusively sold at this location. A later investor questioned wether they would have further 'wholesaler chanel' opportunities and Laurent was quick to point out that they are autonomous and the structure we have of vertical sales allows us to leverage product margins in exploring product technologies. All inventory and staff at the Harrods location are Lululemon owned, not inventory wholesale purchased by Harrods with Harrods trained staff.


**Price increase. A very savvy investor questioned their previous earnings calls remarks about May starting off a bit slow (customer traffic) vs. what they have reported the earnings being for the quarter. He questioned wether or not this was an isolated blip or if the trend continued throughout May and to the end of Q2  and then perhaps had a stronger finish?  The response:   "comp question first. we did see the course start out slow in a traffic standpoint. We did not see a meaningful improvement in the traffic trend throughout the quarter. That remained a headwind for us throughout the second quarter. There where other API’s that helped offset that. As we drilled closer to AUR it was a combination of favourable mix and price. That trend is expected to go into 2017. " This basically acknowledges that they have had a significant slow down in traffic but they where able to salvage earnings by other means (lesser product availability, increased margins) and a well performing Seawheeze showcase store (they broke 2 million this year at Seahweeze, last year they where at 1.75).  Later on in the call it was acknowledged that August was very trim for product but that it was not a bad position because it prevented them from having to resort to markdowns. I think if we look at the WMTM inventory levels and listen to what readers are saying about inventory at the outlet stores this points to a really huge problem they are masking. Another investor question asked about the large shipper bankruptcy  potentially affecting guidance and inventory over Christmas. The response was that "We don't have any concerns over supply chain or suppliers or shipping partners that we use. We have a close relationship with 'blue chip' partners. There is no disruption from our shipping partners and our guidance reflects the confidence we have in our supply chain structure.'

Laurent commented earlier in the Q&A period that  'We have seen no price resistance where we've created value for our guests'.

Another very savvy investor and who has obviously done her blog homework has asked 'Please elaborate on what the response has been on some of the new product that has started coming out over the past few weeks and how it is resonating with customers. Response:  "In August we where really lean in our summer products. We certainly left some business on the table in some of this new product that flowed through the store and online (no typical fall product drops as I've been remarking the past three weeks!) We are pleased with the assortment and how the assortment merchandised together (outfitting potentials/product theme) We had vision in design studio and cardio (the sculpt tights and greyvy line). Laurent earlier referred to it as 'minimalist studio collection'. "Guests are responding to mesh, braiding and bonded seams." There has been sequential improvement in the bra and tank lines. Overarching vision that expands to the mens line allows the guest to put together outfits more easily and in a powerful way. " (I really F**king hate this kind of jargon. Who puts together outfits in 'powerful' ways? why are they overarching so much on outfit? this is essentially just driving tank to pant ratio sales and increasing bra sales with the new tank silhouettes which require you to coordinate bra/tank purchases).

24 comments:

  1. Thanks Lulumum for the detailed recap. It was a calculated decision to hold the conference call later in the day, after markets closed, but their stock still got slammed after hours down approx. 9%.

    Mr. Potdevin's said they are coming back to being design focused and working on fit, layering and outfitting I doubt we will see design focus in this fall/winter collection since they don't sound very optimistic about the last half of year earnings. As for layering and outfitting they basically forced their customers into buying their sports bras because the majority of their tanks and tops were purposely designed to expose the sports bra. Maybe forcing is too strong of a word to use but it put pressure on the customer to buy more bras since they were going to be more exposed. I was against this marketing strategy from the beginning and refused to buy into it. This layering and outfitting had nothing to do with giving us good design and quality clothing but rather a marketing strategy to sell more bras along with cheaply made tanks and tops.

    It seems to be that every step of the way decisions have been focused on cutting costs by any means leaving details in the dust, designing product in a specific way to elevate the sales of other product, price hikes that leaving markdown prices laughable and from what I gather after listening to this conference call and Lulumum stating above, WMTM is not going to be giving us better markdown prices anytime soon.
    This company is going to try and squeeze every last dollar out of every piece of clothing it produces before they will ever consider giving their customer a good deal. I am not interested in receiving event focused emails, I would like to receive emails that say, Hey look what's coming your way next week or next month and by the way we have some great markdowns, check our WMTM for some awesome deals, or hey we have emailed you a 15% discount to be used during your birthday month, happy shopping! Or how about an email that say hey guess what classic we are bringing back next month, stay tuned!

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    1. Well said, and exactly what I have been thinking and feeling. It is clear to see, they are not fooling me (or a lot of us, going by many of the comments I have seen on the blog).

      Also, thank you Lulumum for your post above, also very well said and informative. The way they word what they say can be very deceiving but I can see through it, perhaps from being a Lululemon fan for long time (with a kind of love-hate relationship of the brand, haha, and no, I do not love to hate them, I just really wish I could love them and leave the hate behind, but they are making it harder and harder to do so) and following your blog.

      Also, sorry to be so rude, but every time I see quotes from Mr Potdevin or his videos, I always end up literally rolling my eyes (and I am not an eye roller!), he really seems to believe his own BS... also, that ego...

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    2. I apologize, I should not have added that last paragraph about Mr Potdevin, that was wrong thing to do.

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    3. First, thank you so much Lulumum for taking the time to do this recap!
      Anon 6:51AM - love everything you said in your post! so well written. I agree 100% with everything you said.
      Also, what I am getting from this call is that they basically intentionally put out less products so that we were 'forced' to buy whatever is there. I sometimes found myself browsing the website and almost felt like 'hey, I really should buy something, I don't like anything but I want to buy something so how about this'... I did catch myself before making the purchase tho! Interesting strategy but we are no fools, lulu! Stop toying with us!

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    4. Thanks for the write-up, LLM!

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    5. It is sad and clear to see that they are designing with their own top priority in mind (making themselves the most possible amount of money in any way possible) as the only focus. I guess they think that we will all continue to buy just because it is *Lululemon*. They are taking it for granted. We are not fools. The designs no longer have that special Lululemon feel they used to have, yes, they used to feel special, but now, only a feeling of being skimped on in every way possible. And it is not just the bras and tanks... all the crops and pants now are all loaded with cheap mesh, which at this point is clearly another cost cutting measure and not for sake of design or function. Mesh is cheaper material to use than the rest of the fabric being used, as well as being less durable, therefore creating the need to replace bottoms more often.

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    6. @ 7:24 a.m. and @9: 11 a.m. : Absolutely agree with both of your points that the company seems to be prioritizing higher margins and squeezing as much s they can from Lulu consumers in their quest for profits. I wonder, tho if they ARE able to still succeed while alienating their base - which is probably the typical lulumum reader like myself. The reason I pose this question is because we've seen plenty of other companies do this and still manage to succeed for years and years before enough consumers finally were clued in. Hello, Coach anyone? Remember these bags were hand-stitched in the United States for decades until they moved manufacturing overseas, cheapened the leather, and increased prices - all this after the company went public. What do we have now? Crappy leather, branded PVC vinyl bags during the 90's, inflated prices, and more recently, trinkets glued on to the purses in a lame attempt to make them relevant and "fun". Grant it, they had other major issues like overexposure to deal with that Lulu doesn't have ( fortunately ,yet) - but Coach was still able to garner years and years of profits , even AFTER they reduced quality and increased prices. It took foreigners years to figure out that this "designer" bag wasn't so designer-y after all. And that's who I'm wondering if the company is counting on - people who don't have the historical memory of past superior designs, and repeated price hikes - like readers of this blog do. I live within the proximity of two Lululemon stores both within walking distance, and from what I have seen, many of their shoppers are foreigners who either oblivious to these issues or don't care because the brand still has enough cache that they will robotically buy it.

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    7. Good Point Anon 9:28a.m. and I guess only time will tell. My take is that if they continue making clothing that looks less and less like lulu along with poor quality fabrics and construction that come with high prices they will lose a good portion of their base. If they continue to ignore the wants and wishes of their base they will continue to shoot themselves in the foot like they are doing by cheaping out on details and coming up with designs that are cheaper to make, period. It's all so ironic because they have customers begging to take their money if only they would give them what they want, what a problem to have!

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  2. I would just like to add that in their quest to sell more sports bras they took the classic CRB and redesigned it, yes with a higher front but their focus is selling their strappy bras so they narrowed the racerback so that more of their strappy bras would be on display. They took a classic and without any consideration for their customers who loved the classic design, and revamped it for their own personal greed. This clear lack of disrespect for their customers is so glaringly apparent it sickens me. To top it all off the workmanship of the seams are atrocious and they raised the price. Another classic bites the dust under the management of Mr. Potdevin.

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    1. Absolutely. 100%.

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    2. I agree with you as well. Ultimately, greed of this sort never triumphs -- unless perhaps prices are justified (or at least made tolerable) by amazing innovation. However, I have seen no innovation at Lulu right now -- not to mention the disheartening demise of many beloved classics.

      The irony is that I will now not buy CRBs, whereas I used to buy the classic version frequently -- enough to amass a large "collection" over the past 6 years. Actually, I feel as if the new CRB does not even particularly showcase bras better than the old version. Because I am a shortie -- with a short torso -- my Lulu bras always peek out of my original CRBs in the front -- which I personally like. Moreover, strappy bras, like the FTBW, show plenty in the back IMO.

      Some say, the CRB 2s are great for petite women. Not so. I always have gotten my CRBs hemmed; I would still have to hem the new version, just less. However, I guess I won't ever find out since the CRB is a less versatile piece at a higher price.

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  3. A lot of BS in their responses. Responses like this - "Guests are responding to mesh, braiding and bonded seams" - are so vague as to be meaningless.

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    1. Guests do respond to mesh and bonded seams, but mostly in a negative way. Mr. Potdevin probably did want to omit this small, insignificant detail.
      Thank you, Lulumum, for the report. We know it was a lot of work on your part, but your information is priceless.

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    2. First thank you LLM for taking the time to recap this for us! I know all of us appreciate all you do! :) Now I totally agree anon 8:48 and anon 10:07, I thought the same thing, 'guests are responding'? Umm does anyone over there truly listen to what guests really want? Enough with the mesh already! I for one loath it, always have! If you're a runner I get it, you get hot and they are I'm sure very functional however as an instructor, When every single new 'innovative' pair of pants come out and they look stunning only to see the entire back leg covered in mesh? Well what's the point of wearing pants at all? Just wear shorts!

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    3. That was exactly my read and why I said it was so vague - if the response to these things were at all positive, they would have absolutely noted that.

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  4. 'Guests are responding to mesh...' - HOW? Exactly how are they responding? If he means responding by complaining and demanding no more mesh, then yes, guests are responding.
    bonded seams - does he mean the new CRB II which is a joke when it comes to seams on the racerback??

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  5. I don't have a lot to add to this conversation--everyone has pretty much summed up what I find annoying about this company. I just wanted to say thank you, Lulumum, for listening to this and transcribing it--I'm sure it was a ton of work! Also, you once mentioned maybe fit reviewing/reviewing other companies products. I would love to see that--I am very open to other companies at this point!

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  6. LLM - great post! Thanks so much for taking the time to write this, would love to see this type of post for future earnings reports

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  7. Thanks Lulumum! It's very interesting and I'm curious to see what happens next.

    All I can think is...maybe they need to redo their manifesto now. The giant "friends are more important than money" no longer means much if they are out to take advantage of their customers by manipulating them into buying lower quality items. Didn't someone just post an article that says they removed "develop high quality items" from their financial filing? Some ideas for replacement sayings- "Buy more bras!!" "Heathering rules." or "You can never have enough mesh!"

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  8. I think they were disingenuous as to the real reason product was so thin for August and why we have yet to see a true fall product roll out - they were between designers (or Creative Directors or whatever they're calling them). We've yet to see the true "vision" by Lee Holman. This is what staff at my stores are telling me.

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  9. just came back from the whistler store. the entire store, all mannequins without exception (whether is the tank or pants wall) were dressed in either white, gray or black outfits. ALL mannequins!! I have nothing else to say.....

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  10. Thank you LLM for the recap! Really appreciate all your hard work!
    Bottomline is that Laurent Potdevin is a complete idiot. I don't know how else to put it kindly. He need to get his head out of who knows where and get his butt into high gear. The response all across the board is that mesh is horrible!!! And why ruin a good thing? The CRB!!!!! That's my go to piece. I always pick one up and now I refuse to even touch the CRB2. It's just a joke. Reducing the amount of fabric and calling it an updated version isn't going to work on me sir.

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  11. Chip Wilson, the wise one, the one with the vision. Laurent Potdevin, the blind leading the blind.

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