... Also for ivivva, we are developing a new line in partnership with Disney Consumer Products for spring 2012 providing girls with dance-inspired athletic wear that fits their active lifestyle and ties back to the Disney Channel dance comedy series, Shake It Up!
...Beginning next year, you will see us add additional country sites to our e-Commerce, along with other grassroot strategies to seize the market while remaining focused on the large opportunity we continue to have in the U.S.
...Another major initiative for us has been improving our inventory flow. We have achieved one of our objectives, which is to be inventoried in our core and key items. Our inventory position on new and seasonal items is still a little lighter than we would like it to be for Q3, and we will continue to build levels in those categories throughout the quarter. Our focus going forward will be on-time deliveries and the flow of new styles for the optimal mix of colors, seasonal items and innovation. This matches our new product initiatives, which are focused on technical product, new fabrication, as well as new features within our basics such as a new seaming technology. Better flow of this merchandise is an opportunity for us in the remainder of 2011 and 2012, especially in Canada where our customer gravitates towards anything new that we introduce.
Q&A
Q: ...you mentioned some of the new innovations that you've rolled out, some of the lighter weight, seaming and things like that. I was wondering if you could just give us a little more color on the kind of things you've added in over the last couple of months and what the response has been.
A: [Day] Great. Let me start with the third one. In the U.S., the business has just been phenomenal, and the new markets that we're opening in, including and particularly the Midwest area, the guests have just been phenomenally responsive, so we're very happy with the productivity of our new stores. And just in general, very happy coast to coast with where the U.S. businesses and the growth that we're seeing there. In terms of new product innovation, first, we're just happy to have really great products in the stores. I think us and our guests are very relieved to see the level of products that we have. And in the Men's business right now, particularly we've got some great products in the outerwear that we're very excited about. It's the best Men's presentation we've had all year, and with that, I'm going to turn it over to Sheree to talk about some of the other new products such as we have the bike pod and some other things in the quarter.
[Waterson]Great. As Christine just mentioned, we had a cycling capsules that did very well, and we continue to leverage our learnings from this capsules and put those into both our yoga and our run technologies. On the technical front, we have more no sew technology than we've ever had before, which is laser cutting and gluing, laser cut venting and mesh technology, along with more seamless technology and something that we're calling, Light As Air, which is ultra light jackets, ultra light run skirts and ultra light run tops. So those have all been really very well-received
Q: I'm wondering about the cycling category and if that will be developed into a full-scale business category as we move forward for both men and women.
A: [Waterson] I have to say we love cycling. We absolutely do there's -- because of the fact that it's a multi-pronged type of business. It's commuting, it's road-biking, it's spins. It's all of that. And the capitals have been successful. We have a strategy to leverage e-Commerce for this as well, so that we can show our cycling capital for a longer period of time. Right now for the next couple of quarters, we're just going to be leveraging the capital strategy that we have, which is infusing our current assortment with drops quarterly or twice quarterly and stay tuned, stay tuned.
Q: ...if there's been any impact from the Athleta stores opening nearby your stores? And then second, John, I'm just wondering at what point you would actually pass through higher cost to customers, higher sourcing costs that is.
A: Well, on the Athleta question, I mean, I keep asking the same question whether it's Athleta or other and the answer is consistently there's no measurable impact.
[Day]I think we're comfortable with the current level of anticipated costs, and we have enough efficiency in the system and leverage that we feel that the best value for the long-term brand is to stay kind of put. That said, what we look at is as we design a more technical garment that we do take the pricing on those. So I think you'll see the pricing kind of expand in the new garments with where we have that technical value that demonstrates for the guest and then keeping some of the core basic at the current level of pricing unless we do a specialty item for the season. So for instance, a specialty hoodie or defined jackets or something that has something unique in it, but keeping the basics priced well, and then taking pricing in the new technical garment and probably ending up with a more kind of blended approach.
Q: Just a quick question on direct-to-consumer. I think on the last conference call, you had indicated you were hoping that would be about 10% of sales for the full year. I just wanted to see how you are tracking towards that goal, is that something you think is beatable when all is said and done this year.
A: [Currie]Yes, because of the transition as you recall, it was something lower I think it was about 7.4% in Q1, 8.8% in Q2, which was lower at the start of the quarter and ended the quarter at something close to that 10% level. So with us being a little bit behind that 10% target, we still feel that we'll very close to that for the year, but not likely to be above that for this fiscal year.
Q: And then on the ivivva-Disney partnership, could you explain that a little bit more? Is that product only going to be sold at ivivva? Is it going to be sold through any Disney channels or any kind of color on that would be good.
A: We won't sell it through any of the Disney Channels, but we are working with them on unique opportunities, which would be either more pop up or trunk show-type things in the U.S. to increase our pressure -- our presence there. It will be sold to a select number of items that it will have a tag that will indicate them as Shake It Up! items, and those will be available online and in our stores.
Q: You've done a great job with your jackets as far as the diversity, and it looks like there's a lot more detail in your outerwear, which I just noticed you raised your price point on the new raincoat. And I wondered if you could give a little bit more color on these categories as far as will you do more outerwear?
A: Yes, outerwear is a category that's on fire for us right now. And I guess the question that you'd ask is are we going to be doing more outerwear. I think we're going to be doing more variety in outerwear. Our guest is really, really responding to not only the function, but the beauty and the novelty I think of some of the offerings. So we're looking at that. There's also other types of outerwear that are coming up on our radar like lightweight puffy's so on and so forth that are excellent as part of the layering system for run or upper yoga. So, yes.
A: You've done a great job as far as the improvements on your website, and I wondered if you -- there were additional improvements coming, and will you have the ability at some point, I don't know if you have the systems to pull inventory from the web or from other stores. Will the sales associates be able to do that?
Q: I think what you saw in Q2 was us really settling into the platform and really understanding how the team works with it. And I think where you're seeing us focus now and to give you a preview of what's coming, yes, look for some expanded improvements heading into holiday for the site itself. And then I think longer term, we are looking at what are those right cross-channel opportunities specifically around the inventory availability to allow our guests to find the products that they're looking for and how can we help them. So I think that's more of a broader-term strategy for us, but I think you will see us focused in the short term on improving the overall experience on lululemon.com. And we've been really excited to do that in the short term.
...I don't know if you saw, we did launch our mobile site in the quarter, and that product is already exceeding our expectations. We know that our guest is a pretty active mobile user. She has her particular iPhone with her during the day, and she's actually transacting pretty regularly on it, and so we're really pleased with the progress we've made to-date so far there.
Q: Great, and as far as being able to pull inventory?
A: Yes, I think that's a longer-term strategy for us and one that we're looking at right now. I think initially just getting the right level of product availability in the inventory in our DCs to serve our current e-Commerce business has been our primary focus. And then once we sharpen the pencil there and get better at that, I think you'll see us expand our strategies beyond that.
Q: .And then in terms of you mentioned additional resources at the head office, could you just talk about where you're prioritizing the growth now and adding the most of the team and where do you feel you have the most pressing hires?
A: We're definitely working in that digital space and building out Chris' team, and we had tremendous opportunity in things like content in our editorial voice in the brand area and sharing our story, which we think is really, really critical for us. So a lot of the web infrastructure, everything from that content side, certainly the e-Commerce platform and that breaks us into Catherine's team, the IT team building our debt. So we're able to be self-sufficient in our systems, not as dependent on outside contractors and consultants. So Catherine's done a very nice job of building a team since she's got here. And then still in the design group, we still see many opportunities to be innovative, and we have so many product ideas bringing in the talent to develop those and continuing to deepen our bench in the designers, which we view as a critical area. And then as we're growing as a company making sure that we have enough in our plan for succession planning and that we're at the executive and then developing the next layers is what we're really working on for you to see some general staffing increases at the mid-management level, but primarily areas are the digital IT, brand and products and supply chain
Q: Can you talk a little bit about sustainability of your markdowns? I know that you benefited clearly from having some really strong demand but as inventory picks up and comes more aligned with your existing sales trends, do you expect markdowns to increase in pressure gross margins?
A: ...the last 2 quarters and the last -- end of last year, I think I've said every call that our gross margins come through higher than even we anticipated because of the real lack of markdowns. But the balance is if we want a better inventory position to meet demand by definition, there will be more cleanup, more markdowns. And so that can be a couple of hundred basis points of difference in the gross margin, and we do expect that.
Q: ...question is just on the Men's, can you give us an update on how that's performing relative to the Women's products? And then lastly, a more strategic question. I was in one of your stores yesterday, and the product looks great, and the store looks fantastic. And clearly, the U.S. opportunity is very robust. So I'm a little bit confused as to why you're opening up a second concept of ivivva and pursuing growth in countries like Australia. One could argue it's fairly early point in the growth curve for the U.S. So just -- so if you could comment on the strategic approach from the timing of those initiatives.
A: ...as we said in the call, our focus is North America. But in Canada, you've got a business that's 11 years old. It's very high productivity. We believe in a more scarcity model with stores with very high volume per store, and we've also teamed with this guest in Canada. We own a tremendous amount of her activewear wardrobe, and there's been tremendous demand to create that for a younger group of girls. And what we saw happening for the brand in Canada was as the customer got younger and younger, our target avatar is that 32-year-old, and she doesn't want to wear what 11-year-olds are wearing. So we felt strategically if we did not address product for that younger girl, there would be brand erosion in the Canadian market for our core lululemon. And so we've got a very successful concept in ivivva that we believe has great legs, but we are not in any way distracted from the North American opportunity for lululemon, which is why we're not -- even though we see tremendous global opportunity right now, pursuing that and staying focused on building the infrastructure to support the North American, particularly the U.S. expansion.
Q: can you comment specifically on yoga pants where I've seen an explosion in competition, albeit not what you guys do. And then third, on the Men's business, I guess I'm in California, and I'm seeing a lot more of it just being worn around, and I'm wondering can you comment on the growth in that business and what you're seeing there and your confidence in your ability to take share in that market rather than people taking share from you and Women's?
A: Okay, on the yoga pant competition, we certainly see a proliferation in the marketplace of copy cat product that comes from sometimes the technical players, meaning the athletic wear players and -- but a lot from what I'd call the other softline casual wear, activewear-type players, with the performance and quality level is not really comparable. And I think that's our huge competitive advantage is the technical detailing of the pants, the longevity of it, the fit of the garment. So we're not really seeing anybody come up with something that as directly comparable, and the different channels that they're sold to. I think our guest experience in the store is also what brings that guest back. So even though there's a lot of proliferation, it's really coming at that lower -- it's on price in general and there are quality issues at that price for the guest. So we're not currently seeing any erosion or substitutions from our core guest who seems to be very loyal. In Men's, we've been very light on product as we've kind of re-shifted the line. We really felt in the past we weren't -- we had a lot of casual wear pieces and we weren't technical. So we stripped those out, stripped the inventory down and have worked on building a lot more technical line for Men's. And the response has been terrific. We have some items that the men are just incredibly loyal to such as the technical shirts and the shorts. And we're just now building on that targeted line. We have a fantastic new Men's designer. We're very excited about the product that he's putting out, and we think the Men's product we have in the store right now is some of the best that we've had. And I think you'll continue see that grow at a pace faster than Women's, but still staying still below that 15% in the store in the short term.
Q: Can you talk about the brand and the perceptions of the brand and perceptions of the product and how that's changed as the company has grown and moved into new markets whether it's the Midwest or the growth that you're seeing in Australia, maybe some of the stuff you have in Hong Kong or new categories, Men's. How are people, how are consumers -- you've done research around how consumers are viewing this brand and how it's changed?
A: We don't believe in a lot of formal research, but we believe in being present and being out there a lot. And so what I'm seeing and the team is seeing is a deep, deep affection and love of the brand for everything that we stand for, not only that product quality but the guest experience inside the stores, on the education, how we participate in the community that authentic giving, our relationship with ambassadors and the work that we do to support their businesses and in a very genuine way. I think what we're seeing is a very deep brand loyalty, which we're very proud of. And I think importantly, the people know that the product stands for something more than just the quality of the product. Really the brand association is with living a great and healthy life that you love, and that's really what we're focused on, and people know that the brand is more than just a product. And that they come to us for whether it's the goal-setting sessions that we do at our stores, as well as the free yoga classes that we do. People come in to feel good, and they feel good about the association with the brand, and that's critical part of our strategy is to continue on that.
A: That's definitely our focus and where we believe we have the opportunity to differentiate. What we've seen happen in the past recessions is people strip quality and details out of product to lower price point, yet the guest that we serve really wants those, and that's given us tremendous opportunity to take market share. And our guests respond to that, and that's what differentiates continuing her to make that purchase. So technical is our emphasis, and we add beauty to garments, but we want to make sure that people recognize this isn't about adding fashion. This is about adding technical function, and the detailing that's functional that she's looking for but we do it in a beautiful way. So that you will continue to see us penetrate more and more of the line, but yet keep a very strong basic key and core so that we have, so which is highly technical and quality product but differentiating ourselves even more with that technical product but at the upper end. So right now, the key and core is something close to about 65% of the business plus or minus on a regular basis so that might lower a few percentage points as we penetrate with even more technical product.
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