Lululemon Athletica Inc (LULU) — Q1 2018 Earnings Call Transcript

Thank you, and good afternoon. Welcome to lululemon's First Quarter Earnings Conference Call. Joining me to talk about our results are Glenn Murphy, Executive Chairman, who's joining us via telephone; and Stuart Haselden, COO. We are also joined today by PJ Guido, our new CFO. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecasts of certain aspects of lululemon's future. These statements are based on current information, which we have assessed but which, by its nature, is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained or implied by these forward-looking statements due to the risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our Annual Report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. The press release and accompanying quarterly report on Form 10-Q are available under the Investors section of our website at www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our investor site where you'll find a summary of our key financial operating statistics for the first quarter as well as our quarterly infographic. Today's call is scheduled for 1 hour.

Thank you, Howard, and good afternoon, everybody. I was thinking today as I was preparing for this call, I went on to our website where you can find an infographic of our Q1 results. The comment I made on the last conference call that laminated Q4's performance was clearly premature. If you read that on our website, you'll see that our revenue was up 25%. That really speaks to the deepening engagement with existing guests. Equally important is how much we've grown our customer acquisition, whether that's in our email file or bringing people in through our app or the website organically. Our gross margin expansion was greater than 250 basis points. We're a premium brand, but that is still a phenomenal performance. That really is our result thanks to the design team, the merchant team, and the supply team working together in a coordinated fashion to achieve that kind of result on the gross margin line. We achieved SG&A leverage of 130 basis points. The business and the leadership team understand we have a growth business here, 25% in the first quarter. The management team is keenly aware that the last year's first quarter results were below the standard we set for ourselves and what this brand can actually deliver quarter in, quarter out. If you combine it together and look at it, whether over two years or more, all key indicators were very positive across categories, channels, or geographies. I just came back from a week in Vancouver, and I can tell you nobody there is doing a victory lap. Our senior management team is focused, executing on the 2018 strategic initiatives to elevate our business to another level. I'm excited about our CEO search progressing well with qualified candidates interested, and I thank Celeste, Stuart, and Sun for their stellar leadership over the past four months.

Thanks, Glenn. Let me reiterate how pleased we are with the performance in Q1. We are successfully executing on our strategies and seeing consistent results across several key parts of the business that are now extending into Q2. While much work remains to be done, we are finding success in driving traffic and conversion increases at both stores and online across diverse geographies. The supply chain and technology infrastructure investments we've made over the last few years offer us a stable platform to grow and scale the business globally. Our current results are a validation of these strategies, and we now have even more opportunity to accelerate these investments in the areas that hold the greatest potential. First, in channel, we saw our investments in our website and mobile capabilities deliver e-commerce conversion increases of 20%. This was amplified by traffic increases of 30% driven by our improved product assortments and digital marketing efforts. Within our stores, we had positive store traffic, which increased in the mid-single-digit range. Within product, we posted double-digit positive comp increases in our core businesses for both men and women. In guest engagement, we saw continued success in our community and digital strategies, which contributed to a 28% increase in guest acquisition in the quarter, fueling traffic gains across both stores and e-commerce. These efforts delivered a strong financial result for the first quarter with total revenue growing 25% to $650 million, and EPS of $0.55 or 72% growth versus the same period last year. Given this progress, we are confident in our plans for Q2 and the remainder of the year, which is reflected in our updated guidance. Looking to the future, we remain firmly on track to achieve our ambition of $4 billion in revenue in 2020. We are excited about our product pipeline as we continue to drive category-defining innovation and solve problems for athletes.

Thanks, Stuart, and a warm hello to all those on the call today. I cannot express how energized I am to be joining such a powerful brand and talented team here at lululemon. I look forward to engaging with our investors and many of you on the phone as well in the coming months. So far, I've spent the last few weeks immersed in the business and getting to know the teams across the company. I've even pulled several store shifts, and I can tell you they are absolutely pulsing with energy and excitement. I look forward to working with Stuart and the entire leadership team, as well as with those of you in the analyst and investor community.

Thanks, PJ. Before I speak to our financials, I'd like to thank Glenn for his guidance and strategic counsel, and our educators around the world for everything they do to bring lululemon to their guests every day. Our total net revenue rose 25% to $650 million with strong performance across all parts of the business. Our store channel delivered a 6% comp store sales increase and in e-commerce, we posted a 60% comp increase. Gross profit for the first quarter is $344.7 million or 53.1% of net revenue compared to an adjusted 50.4% of net revenue in Q1 2017. The gross profit rate in Q1 increased 270 basis points versus adjusted gross margin last year. We're particularly pleased that this increase comes on top of a 380 basis point improvement in product margin last year. We continue to see opportunities to gain cost efficiencies within our supply chain, enabled by several ongoing strategies across sourcing and distribution.

Yes, everyone, and welcome, PJ. Doing a great job so far. So I guess, Stuart, my first question, just high-level, trying to understand the doubling in the e-mail file. That seems to be monumental this quarter, given that your e-mail file was pretty large to begin with. Can you give us a sense for how much of that was international versus North America?

Yes, Matt. The e-mail file trajectory has really been exciting and important. The mix of that is largely weighted towards North America. The reason we've seen an inflection in it is we implemented new applications within our POS system in the third quarter of last year with new training for our store educators to capture guest e-mails at point-of-sale. The combination of the improvements in the website and the point-of-sale execution in-store has really driven that acceleration in the e-mail capture rate.

A couple of questions on men's. Can you maybe talk about the men's business and the growth that you're seeing by region? Also, penetration by region, I'd be curious about. And also, what percent of the new customers that you talk about are men versus women?

We're really happy with how the men's business is performing. We're seeing that performance is reflected across regions, and on a regional basis, the men's and women's business are accelerating proportionately in the same manner. In the first quarter, about 30% of new guests were men, which is higher than the overall level. So, we're really pleased with our men's trajectory.

The short answer is no. The performance of the business and the leadership of Celeste, Stuart, and Sun gives great comfort to the Board of Directors. We don't feel rushed, but we have a sense of urgency knowing that internal clarity about the new leadership going forward is important. It’s nice to have the business performing well and great leadership at the top.

Just under the bell. So a follow-up to that question on the 28% increase. Is there any difference in the demographics you're seeing of the new customers? Is it skewing more male than female? Or any difference there?

The mix of gender shows that 30% of the new guests are men. We're pleased with the increased engagement from male guests. Overall, there's not a significant distinction in demographics compared to our existing guest base.

Thanks for joining us, everyone. We appreciate your time, and we look forward to speaking to you in about three months when we report our second quarter results. Thanks.