2012 Q4 Earnings Call Highlights

Today was the 2012 fourth quarter earning call. Here are some highlights:

Overall it sounds like lululemon is making the right moves to fix their quality issues. They have recently hired a QA person who once worked for Nordstrom. It sounds like they will be incorporating a bend test (see down father under the Q&A quotes) into their pants QA process, too.  It looks like Cuddle Ups and other french terry pieces will be returning for the 2013 Christmas season.  It also sounds like some interesting things will be coming for the future - a woman's golf and tennis line. I am kind of excited for a golf line but less excited to hear that "Innovative construction methods like bonding and laser cutting are also elements we’ve played with in this collection." I am so not a fan of bonding and laser cutting. Most of the time the edges are just too harsh on the bonded seams and irritate the skin. Day described  the golf line as "technical street with pieces that transition from sweat to street" which sounds very intriguing. In the Q&A section Day further stated the golf pieces are not made of luon.

Also, the men will be getting a lot more polo shirts, especially around Father's Day, for use in golf and tennis. I hope these are made of technical materials. My husband has collected the older polos made of luxtreme and silverescent and he really likes them.  The polos will come in both an athletic fit to accomodate a golf swing and a slim fit for a modern look.

Another commuter cycling capsule will also be released.

From the Q&A part of the call:


The Cuddle Up and Cozy Up jacket will return for the 2013 holiday season (yay!). Day said that, "Definitely the number one learning over the holiday, particularly in the Canadian market, was that those more $100 price point cottons that they’re used to having, particularly the Scuba Hoodie, and we usually have something called the Cozy Up and the Cuddle Up, and there’s a variety of versions of that that we offer, which we did not this year, significantly affected that holiday purchase in particular...So this year, the holiday architecture will include more of those $100 price points and the kind of cotton layering pieces that that guest is looking for." [I hope that means french terry staples like Lulu Pant IIs will also return. I love those pants].

Great question, "how did it get to where it was shipping without somebody trying on a pair of pants, like the first batch, to make sure that this wasn’t an issue, and stopping it before it got so out of control?" Not so hot answer, "The truth of the matter is the only way that you can actually test for the issue is to put the pants on and bend over. Just putting the pants on themselves doesn’t solve the problem. So it passed all of the basic metric tests, and the hand feel is relatively the same. So it was very difficult for the factories to isolate the issue, and it wasn’t until we got in a store and started putting it on people that we could actually see the issue." [I believe eds have chimed in in the comments that the hand feel of the bad batch was different - scratchy and slippery were the words used, I believe. However, I've felt scratchy and slippery luons before (the two-color reversible luons have a slippery, spongey feel to me) for a few years now. Anyway, this question just highlights the lack of a thorough inspection at the acceptance point.]

Day stated that quality is going to be a big concern going forward. I know longtime fans are really, really looking for this: [Question]It sounds like quality is going to be priority number one at lululemon, and I’m wondering if there are some permanent investments in gross margin that you think you need to make in order to make sure that your quality standards are strictly adhered to. And this is sort of the second quality issue, I think, in nine months. Is there some sort of an organizational effort to make sure that whenever there are quality issues that appear anywhere, either in the supply chain or at the stores, that there is a concerted effort to raise those issues to senior management and make sure that that behavior is really encouraged so that the issue can be identified early on, and with the least impact to the guest?


[Day] Absolutely. Project Canary, as we’re referring to it. We have made significant investments since last year. The issue you’re referring to, the dye issue, where we brought the experts in, rewrote the whole process for dye, and working in partnership with our manufacturers solved the problem. So we no longer have dye issues, and so we can very much say that with confidence. [True, I haven't seen many examples of bleeding in months now.]

And I feel that we will accomplish the same thing here with the fabrics once we identify exactly where in the chain the breakdown was, and have long term solutions for this. The big shift for us is making sure that we have people actually on site in the mills and the other environments, and that’s the infrastructure that we started investing in this year. And we’ll continue to do so this coming year.
The whole organization is obviously very devastated by what’s happened. And so everybody understands the sense of urgency of making sure that we alert the small noise and symptoms that we see, the little canary chirps, getting those to us as quickly as possible so that we can deploy the resources to avoid anything like this again.[Gosh, I really hope so. Their fantastic luon was what made the company. You would think because of all the attention this issue has received the fabric and quality will only get better. Fingers crossed.]


A question was asked regarding what is being done with the bad pants and whether they will be sold at the outlets. [Day] "Right now we’re holding all the product, because there actually might be some treatment solutions that we’re investigating, that actually could solve some of the problems. So until we get those test results back, we haven’t made a decision at this point in time. [It's my understanding from five minutes of googling that what leads to a fabric being see-through is the weave. I can't believe there is a treatment process to fix that.]

She talked about some new hires, a woman with prior experience at Nordstrom to handle QA and a man from Speedo to help develop fabrics. I had heard about the Speedo guy before. 

Day specified that the affected pants were Grooves, Wunder Unders, and a luon short so that sounds like Boogies or reverse Grooves. Also, a couple of seasonal styles. I wonder whether those were the Presence Pant - anyone try to take back their new Presence Pant? I know for a fact it's not Coast to Class. Those were still hanging in my store yesterday.

Very pointed question about their QA testing process: "Sorry to harp on QC, but it sounds like you were starting at sort of ground zero. In other words, for other manufacturers, the idea that you have to put the pants on and bend over to test them out is something that would happen before they hit the stores. So is that correct? Are you really sort of behind the curve on processes in general beforehand, do you think?"

[Day] "I don’t know of anybody else who has people actually… I mean, at final proto in garments, where we make up… Of course you would produce all of those tests, and we do wash tests and do a lot of other things at that stage. And then when it goes to bulk manufacturing, you’ll do random sample pulls. But again, I’ll stress that this product passed all initial testing that we’re aware of, so the whole conversation at this point has been where did it break down from that initial testing, and that’s what we’re trying to figure out. You wouldn’t notice the change from hand feel, and it’s not a simple put it over a mannequin, it has to be engaged in a four-way stretch for the sheerness to appear. So it’s a very complex thing to test for, and that’s what we’re looking at, what can we do a better job of to make sure that we can identify that earlier in the process."

A good question about the change to men's sizing to have a more accommodating fit and how it affects the market lululemon is going after. [Day]"We definitely think that it makes it broader, because our core market is that athletic male and the style should be styled slim, not a slim fit. And as we’ve made that modification, and brought back things like the favorite kung fu pant, that sold out very quickly and we went back into reorder on that." [Some commentary on this. My husband take a lululemon size Small and men's 30" waist. For a few months lululemon dropped the 30" waist on a few items and increased the size of the small waist on their very popular Run: Response, now Pace Breaker, shorts. The sizing change on the shorts happened when they moved the zip pocket from lower on the leg to be opposite the regular pocket. Since they didn't fit him right my husband stopped buying new Run: Response shorts and started searching out the older style on eBay. About six weeks or so ago, lululemon put a sizing notice on their website. Yesterday my husband finally wore the new Frond Pace Breaker shorts to the gym for a run. These were part of the batch that included the refined sizing and he really liked them. He liked the new location of the zip pocket and the fit is perfect. So those men who were sitting lululemon out because your fit had changed, check them out again. It seems it has been tweaked back to where it was before.]