LULU

lululemon athletica inc. (LULU)

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Lululemon Athletica (LULU)

Q4 2010 Earnings Call

March 17, 2011 9:00 am ET

Executives

John Currie - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Sheree Waterson - Executive Vice President of General Merchandise Management, Supply Chain and Logistics

Christine Day - Chief Executive Officer, President and Director

Melissa McKay - Investor Relations

Analysts

Dana Telsey - Telsey Advisory Group

Sharon Zackfia - William Blair & Company L.L.C.

Stacy Pak - Prudential

Taposh Bari - Jefferies & Company, Inc.

Claire Gallacher - Capstone Investments

Lizabeth Dunn - FBR Capital Markets & Co.

Michelle Tan - Goldman Sachs Group Inc.

Paul Alexander - BofA Merrill Lynch

Christian Buss - ThinkEquity LLC

Tracy Kogan - Credit Suisse

Howard Tubin - RBC Capital Markets, LLC

Rob Wilson - Tiburon Research

John Zolidis - Buckingham Research Group, Inc.

Erika Maschmeyer - Robert W. Baird & Co. Incorporated

Laura Champine - Cowen and Company, LLC

Edward Yruma - KeyBanc Capital Markets Inc.

Janet Kloppenburg - JJK Research

Presentation

Operator

Good day, ladies and gentlemen. And welcome to the lululemon athletica Fourth Quarter 2010 Results Call. [Operator Instructions] And now, I'll turn the call over to Melissa McKay of ICR. Please begin.

Melissa McKay

Thank you. Good morning. Thank you for joining lululemon athletica's conference call to discuss fourth quarter and full year 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 the SEC available on the Commission's website 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 website.

Hosting today's call is Christine Day, the company's Chief Executive Officer; and John Currie, the company's Chief Financial Officer.

Before we get started, I would like 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 [ph] projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC.

I'd now like to turn the call over to Christine Day, lululemon athletica's Chief Executive Officer. Christine?

Christine Day

Thank you, Melissa. Good morning, everyone. The fourth quarter was a fitting finish to 2010, giving us four solid and consistent quarters of growth for the year. Our fourth quarter revenues increased approximately 53%, and for the year, sales were up 57%.

Looking back, we were able to increase our inventory position throughout the year, which allowed us to continue our momentum against more challenging comparisons in the third and fourth quarters while also fueling our E-commerce business in the fourth quarter. And even though we achieved a strong Q4 comp increase, we still believe there was unmet demand across all product lines in our stores and E-commerce channel.

In E-commerce, we achieved our goal of 10% of total sales in the fourth quarter. And even though we will have a short-term disruption to this business as we re-launch our site at the end of the first quarter, we project staying at 10% in 2011, just our second full year in the E-commerce business. And we have set a new midterm target of 15% of sales.

Given we are still learning a lot about E-commerce and have been perpetually under inventoried on our site, we know that we are still at the early stages and see a tremendous opportunity to grow this channel. Also adding to our total sales growth for the fourth quarter were 12 stores we opened in the U.S. during 2010, which were performing close to the average of all our U.S. stores. We believe our expanded showroom strategy was a major driver of this success [ph].

Looking at our profitability, we achieved a record gross margin of 55.5% for the year and 58.5% for the fourth quarter, both benefiting from strong sell-through and an unusually low level of markdown. This pushed our operating margin to 25.3% for the year and over 29% for the fourth quarter. While it is unlikely that we will be able to improve on these margin levels in the near term due to rising sourcing costs, we continue investments on our infrastructure and growth initiatives. We do believe we have a best-of-class business model that will enable us to continue to enjoy very strong profitability in 2011 and beyond.

So to summarize 2010, the year was characterized by strong guest demand for our product, limited markdowns, multifaceted top line growth and leveraging costs while still making important investments, all netting to record profitability. We added capability to our senior management team with the addition of a very seasoned CIO, with experience in the vertically integrated apparel business, and a new VP of Human Resources. Both are proving to be very valuable to the organization. Another major investment was our new distribution center in the U.S., which will provide us with cost savings in 2011 and beyond.

We believe that our overall strategy heading into 2011 is more dynamic than ever. It includes driving organic revenue growth, increase supply chain capacity and capability, continued focus on our in-store guest experience, continued innovation in yoga and run, grassroot community and a digital strategy to expand our online community presence, strategically placed showrooms converting to stores, resulting in the opening of up to 30 new stores, and the launching of our new E-commerce platform.

Moving into the first quarter of 2011, I want to highlight our inventory position and our E-commerce transition. First, the exceptionally strong sell-through of our Q4 product left us under inventoried to service our Q1 demand. In addition, as each new delivery arrives, it has been selling much faster than planned. Our new product deliveries are now weighted towards April, beginning the replenishment of our inventory position.

Next, as previewed last year, we are transferring our E-commerce platform from our current third-party vendor to our in-house ATG platform. This is a complex project that requires significant IT infrastructure changes and integration of multiple service vendors to a new site. It also requires a physical move of inventory from the third-party supplier to our own U.S. DC. The date of the official transfer is April 15th. To facilitate the cutover from our vendor systems to ours, the entire site will be down for a few hours so we can test new site integration. This will occur during the evening hours of April 14 to early morning of the 15th.

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