Lululemon Athletica 3Q Earnings Call Nuggets: Margin Guidance, Trends

Lululemon Athletic Inc. (NASDAQ:LULU) announced its third quarter earnings report and in the conference call, the following topics may be of interest.

Fourth Quarter Margin Guidance

Lorraine Maikis Hutchinson –┬áBank of America Merrill Lynch asked: I want to talk about the fourth quarter gross margin guidance for a minute. It seems like quite a bit more of a drop versus what you had in the third quarter; I guess are you seeing product costs escalate further.

Do you just expect the fully in-stock inventory position lead to more markdown?

John E. Currie – CFO responded: It’s more of a second. The inflationary pressure we guided previously in the third quarter was give or take 250 basis points; we expect the same in the fourth quarter.

Really, we’re reflecting and assuming that with our inventory position as you’d expect to more normalize markdown level.

Christine Day – CEO responded: I’ll just add a little bit of color to that.

We did not clear in the third quarter. We didn’t have a warehouse sale, which we had the year before, so we didn’t have enough products to do it.

Then because inventory receipts were little later than we would have liked, we didn’t do the markdowns until October. So, we’ve already cleared any product that we would have wanted to clear at the beginning of this quarter.

Looking at January year-over-year, last year we didn’t have any product to do the holiday sales we sold through full price merchandise.

This year, we anticipate we’ll be in a more normal markdown post-holiday mode, so year-over-year I think it’s important to recognize that both October and January will be a little different for the fourth quarter.

Trends

Michelle Tan – Goldman Sachs asked: Could you give us a sense of what kind of trends you have seen so far in November? Then maybe talk a little bit about the timing of when out of stocks last year really started to materially impact your sales trend, looking at the fourth quarter and the first quarter.

Christine Day – CEO responded: I think sales did really well in all of the fourth quarter last year, which we sold through everything that we had brought in early. We really eroded our base going into the first quarter.

If I look at our year-over-year first quarter base of inventory, it was down 40 percent. Then we sold through strongly in that January finishing off the fourth quarter.

So, going into the first quarter–beginning in February–we were 40 percent lower than we really should have been to support the sales from a Chinese New Year, that’s really when you thought and March, if you recall, was probably our worst out of stock period.

That definitely affected our sales ramp and began that chase cycle. Where we really want to be is set up for a strong first quarter and most importantly for us, it’s the energy we spent on chase; I’d really rather be spending on innovation. So, the cost is more than just sales.

It’s about creating the future.

Our goal for 2012 is to set ourselves up to have a strong inventory flow throughout the year and that’s what we have been working on.

We feel we are in a great position to accomplish that. In summary, very little impact to really the fourth quarter last year, most of the impact into the first quarter.

This year we’ll be really careful watching and frankly capping sales so we don’t impact the first quarter.

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