Lululemon Athletica Inc. Q1 2010 Earnings Call Transcript
Lululemon Athletica Inc. (LULU)
Q1 2010 Earnings Call
June 10, 2010 9:00 AM ET
Executives
Melissa McKay – Investor Relations
Christine Day – President and CEO
John Currie – Chief Financial Officer
Sheree Waterson – EVP, General Merchandise and Production Manager
Delaney Schweitzer – EVP of Stores
Deanne Schweitzer – Head, Strategy and E-Commerce
Analysts
Michelle Tan – Goldman Sachs
Paul Alexander – Bank of America/Merrill Lynch
Tracy Kogan – Credit Suisse
Edward Yruma – KeyBanc
Liz Dunn – Thomas Weisel Partners
John Morris – BMO Capital
Janet Kloppenburg – JJK Research
Chi Lee – Morgan Stanley
Claire Gallacher – Capstone Investments
Richard Jaffe – Stifel Nicolaus
Howard Tubin – RBC Capital Markets
Taposh Bar – Jefferies
Jennifer Black – Jennifer Black & Associates
Kristine Koerber – JMP Securities
Laura Champine – Cowen and Company
Presentation
Operator
Previous Statements by LULU
As a reminder, this conference is being recorded. I would now like to introduce your host for today, Ms. [Melissa McKay]. Ma’am, please go ahead.
Melissa McKay
Good morning. Thank you for joining Lululemon Athletica’s conference call to discuss first quarter 2010 results. A copy of today’s press release is available on the Investor Relations section of the company’s website at www.lululemon.com or furnished on Form 8-K with SEC available on the commission’s website at www.sec.gov.
Today’s call is being recorded and will be available for replay for 30 days shortly after the call in the Investor Relations section of the company’s website. Hosting today’s call is Christine Day, the company’s President and Chief Executive Officer; and John Currie, the company’s Chief Financial Officer.
Before we get started, I would like to remind you 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 in such statements due to a number of risks and uncertainties, all which are described in the company’s filings with the SEC.
Now, I’d like to turn the call over to Christine Day, Lululemon Athletica’s Chief Executive Officer.
Christine Day
Thank you, Melissa. Good morning, everyone. And thank you for joining us to discuss our first quarter results. With me today are John Currie, our CFO; Sheree Waterson, our EVP, General Merchandise and Production Manager; Delaney Schweitzer, our EVP of Stores; and Deanne Schweitzer, Head of Strategy and E-Commerce. Following my opening remarks, I’ll turn the call over to John, who will go through the financial details of the quarter.
We are very pleased with our first quarter results, as our momentum from the fourth quarter continued into 2010. Our comparable store sales were 35% for the quarter on a constant dollar basis and we delivered $0.27 in diluted earnings per share. This was our company’s best ever first quarter, as we were able to generate very strong same store sales growth in both the U.S. and Canada. In the first quarter, we saw our trailing 12-month average sales per square foot reach $1,428, an improvement from last quarter’s $1,318.
All age classes are comping positively with our 2008 U.S. age class leading the way. We also added incremental profits from our e-commerce business, leveraged our strategic investments in infrastructure and managed our inventory and our margins for a strong flow-through of earnings.
We believe we took the right amount of inventory risk to drive sales and used our rapid response strategies to respond to incremental sales opportunities. Our inventory levels now match sales trends with opportunities to continue to refine channel allocation to e-commerce and to chase smaller sizes to meet market demand. Our yoga and run lines continue to lead sales demand as well as strong growth in equipment and accessories.
As discussed previously, we work toward a target profile of at least 50% gross margin and 20% operating margin, and as you can see we have achieved these targets in the first quarter. As a growth company, we will continue to make strategic investments to protect our iconic items such as the Hoodie, while scaling our infrastructure and people capacity as part of managing our brand and business model.
As you have seen in the past quarters, we have made these investments while keeping the overall business model at a relatively stable level, near or long-term targets. As we strategically manage our brand and business for the long-term, from quarter-to-quarter there will be incremental flow-through or occasionally contractions in gross margin or operating margin.
The flow-through this quarter was very strong due to a combination of market factors, such as strong demand for our product, leverage on sourcing, limited markdowns and timing of investments towards the back half of the year, as well as, leverage on stronger sales. Looking forward, we do see some sourcing pressure from materials and labor costs and reductions in out of stock.
Turning to revenue growth, our first priority remains growing existing stores. Our second is e-commerce and our third is new store openings. We have opened four stores in the first quarter in North America. We have also opened 14 showrooms in Q1 and will open 30 more between Q2 and Q3 for 44 new showrooms being added this year to the 14 existing at the end of 2009.
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