Lululemon Exec Insights: Learning from Capsules, The Macro Market and Low Positives

On Thursday, Lululemon Athletica, Inc. (NASDAQ:LULU) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with investors and analysts.

Learning from Capsules:

Sharon Zackfia – William Blair: So, two questions. I think John, you said something on the order of the expectations that you have for the rest of the year essentially unchanged. Obviously, I think, your second quarter guidance was a little bit below what the street expected. Just curious if you’re seeing anything so far in the second quarter that we should maybe be concerned about? And then secondarily, on the capsules, I think, there has been anxiety in the market, as I’ve seen more of the risk, you have been taking on the product, and if you could help us understand how those capsules evolve over time, how you analyze them into potentially becoming permanent parts of the collection going forward, and how we on the outside can really view those and kind of analyze the instruments as you mentioned, Christine?

A Closer Look: Lululemon Earnings Cheat Sheet>>

John E. Currie – CFO: I mean on the guidance for the balance of the year, as Christine mentioned, we’re basically right on plan for the year. The cadence quarter-to-quarter, because I hadn’t given guidance on quarterly revenue previously, so our Q2 guidance is really consistent with where we expect it to be, and we feel good about the way the business is running right now.

Christine Day – CEO: On the capsules, we see they’re doing exactly what we want them to do and we had planned for the impact of those capsules to appear. The two that have dropped, which are swim and the commuter line; on swim, we learned a lot about the technical manufacturing of swim, and while we think they were some things that were our overall successes and that were really great, we learned a few things about fit and function and fabric as we constructed those swimsuits. So, we had great guest response to them, but we also, I think, learned some things technically, and the beauty of capsules and why we’ve deployed this strategy is that we don’t make big buys in new categories and then have huge markdowns or place big bets. So, these are small controlled bets, one time, where we take the learnings, always looking for that anchor piece that we can take forward. On the commuter capsule, that was very successful, we learned a lot about some great pieces in that commuter capsule but we felt that we made a little bit of an issue with the buy there doing it a little deeper than we should have for the capsule and pull that back. So the learnings that we take from one to the next I think are great, we tried the new fabric, so those are things that will compress our margin in the short-term, but then we also can translate some of those learnings in other product lines. Sheree, do you want to add anything?

Sheree Waterson – EVP, General Merchandise Management & Sourcing: No, thanks.

Christine Day – CEO: So I think we feel that we got some great learnings about the bike and also to be clear that we don’t just may be test something once, something like the cycling could repeat and we will come back later in the year with some additional tests. So, we feel that’s a very controlled way to manage our long-term growth opportunities and it’s the right thing as a market leader to continue to innovate.

The Macro Market and Low Positives:

Adrienne Tennant – Janney Capital Markets: Christine, my first question is, can you talk about the macro environment in Canada versus U.S. versus Australia, which of those – as you look into the back half of the year, are you planning for largely those to be similar, worse or better in each of those markets? Then for John, can you talk about low double-digit positive? I am assuming the debt by definition 10% to 12%, it’s a deceleration from the first quarter trend, so can you give us any color on how you exited the first quarter and typically I’m assuming, could you give that guidance based on what you are currently seeing if that’s the case?

Christine Day – CEO: I think market-by-market, we feel optimistic about each one of those markets, and while we have sometimes day-to-day choppiness, we know it’s more related at this point to our product flow and timing of deliveries. We hear a lot of noise in the macro market. I think like other retailers, we’re going to control what we can control, we’ve always been disciplined planners, looking at upside and downside and I feel we are well poised to manage through anything. Anyhow, John and I are professional worriers, so we always will look at that and have our contingency plans, but at this point we don’t see anything that as we stated in our guidance that’s going to change our outlook for the year.

John E. Currie – CFO: In terms of the Q2 comp, remember Q1, part of our ability to hit a 25 comp in Q1 was because we were so under-inventoried a year ago, so one thing to remember is Q2 and balance of the year is getting to a tougher compare, but beyond that again it’s really product flow. We’ll – again, in terms of comp, last year was very up and down, and so the comp, month to month, week-to-week, and quarter-to-quarter is a function of what we saw a year ago. But in general the strong comp in Q1, more modest for the mid-part of the year, and as I said in the prepared remarks, we deliberately chose to not have our product team dedicate a lot of time to chasing inventory to catch every last dollar of revenue. They’re really much more focused on innovation this year, and so as I said the ability to have higher opportunity in product is really backended to Q4.

Adrienne Tennant – Janney Capital Markets: Okay. Did you see any March April Easter shift impact?

Christine Day – CEO: I think, that would be harder for us to tell because of our delivery cycle and what we’re anniversarying, if you remember last year our biggest chase dropped at the end of Q1, beginning at Q2, and we oversold a little bit more than we planned in Q1, so I think, could that have been a little bit of it, yes, but I think separating that from our (indiscernible) product flow for us at this time is just noise, I don’t think it was anything significant.