LULU

lululemon athletica inc. (LULU)

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Lululemon Athletica, Inc. (LULU)

Q3 2010 Earnings Conference Call

December 9, 2010 9:00 am ET

Executives

Joseph Teklits – ICR

Christine Day – CEO

John Currie – CFO

Sheree Waterson – EVP, General Merchandise Management and Supply Chain.

Analysts

Michelle Tan – Goldman Sachs

Paul Alexander – Bank of America

Janet Kloppenburg – JJK Research

Liz Dunn - FBR

Sharon Zackfia – William Blair

John Morris – Bank of Montreal

Erika Maschmeyer – Robert W. Baird

Chi Lee - Morgan Stanley

Taposh Bari - Jefferies & Company

Tracy Cogan – Nomura Holdings, Inc.

Howard Tubin – RBC Capital Markets

Richard Jaffe – Stifel Nicolaus

Laura Champine – Cowen and Company

Jennifer Black – Jennifer Black & Associates

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Lululemon Athletica Q3 2010 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. (Operator instructions) As a reminder, this conference call is being recorded. And now I’d like to turn the call over to Joe Teklits with ICR. Please begin, Sir.

Joe Teklits

Hey. Thank you. Good morning, everyone. Thanks for joining us again for Lululemon Athletica’s conference call to discuss third quarter 2010 results. A copy of today’s press release is available on the Investor Relations section of the company’s Web site at www.lululemon.com or furnished on Form 10-K with the SEC available on the commission’s Web site at www.sec.gov.

Today’s call is being recorded and will be available for 30 days as a replay shortly after the call in the Investor Relations section of the company’s Web site.

Hosting today’s call is Christine Day, the company’s Chief Executive Officer, John Currie, the company’s Chief Financial Officer and Sheree Waterson, EVP, General Merchandise Management and Supply Chain.

Before we get started of course, we need to remind you of the company’s Safe Harbor language. Statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from these projected and such statements due to a number of risks and uncertainties all of which are described in the company’s filings with the SEC.

Now, we'll turn the call over to Christine Day, company's CEO.

Christine Day

Good morning, everyone. Our business momentum continued as we reported another strong growth quarter with total sales increasing 56% and our same store sales improving by 29%. All age classes are comping positive led by our 2008 and 2009 stores. I am also very pleased with the quality of our growth and our disciplined approach to building a strong and sustainable business model as demonstrated by our healthy earnings flow through.

In Q3, we continued to focus on technical athletic products with yoga at our core and our success is evident in our latest results. Our floor technical products such as yoga pants and tops, including our new hot yoga line as well as our run line drove sales as well as our gross margin. This product carries higher merchandise margins when compared to categories like accessories and outerwear. We believe this product has benefited from innovation and diversified fabrics in our tank line and increased layers and technical features such as UV protection and reflectivity in our run line.

During the quarter, we increased the number of events and ambassadors at our stores and also our tenured store managers improved store level execution. Our ability to stay focused on our brand strategy has resonated with our guests and is driving brand awareness and sales. So again, we consider this to be a very high quality increase in store productivity that validates our business model.

Another big part of our third quarter success was our e-commerce business. E-commerce sales were up over 200% from the third quarter in 2009. We improved our inventory position to support sales in the back half of the third quarter, which allowed e-commerce to jump closer to a natural level for this early stage business. And since our site carries and sells a larger mix of technical product and has proportionately fewer markdowns than do our stores, e-commerce also added to our gross margin and operating margin in the quarter. We believe that we are just scratching the surface in e-commerce and that a level of 10% of sales is achievable in the short to medium term.

Our newer businesses, as Aviva and Avila also performed well. The Aviva brand has evolved since its launch one year ago. Sales have grown as we have begun to highlight general athletic wear with a focus on year round athletic activities such as gymnastics, dance and ice-skating as our target guest profile. We also have two pop up stores in place in Canada, which is our way of using grass roots marketing to determine and build demand for permanent stores.

In Australia, our sales momentum neared the strong trend in the U.S. through our heightened focus on community.

Turning to our North American retail stores our new class of stores had an outstanding quarter and we believe credit here should be given to our showroom strategy and our talented managers. We continue to plan for 20 to 25 North American Lululemon stores in 2011, in addition to two in Australia and two Eviva stores. We will continue our successful showroom strategy of all geographies and concepts.

We also made some key hires to support our growth. Kathryn Henry joined us as our CIO. And Margaret Wheeler, our new VP of Human Resources, completed her training and is leading our initiatives on compensation, development, recruiting and systems, to attract and retain an excellent management team.

Read the rest of this transcript for free on seekingalpha.com