Lululemon Sees Sales Perking Up, Aiming for Positive Q4 Comps

“We see solid signs of recovering our business momentum,” said Christine Day, Lululemon's president and CEO, on a conference call with analysts.  Day said the retailer may have lost sales with its focus on lean inventory levels.  “We believe that more product inventory could have resulted in a positive comp through the quarter,” she said.
Among categories, expanded running, organic cotton and natural fiber lines saw a strong response. Day highlighted a “tremendous response” to its running line, with shorts particularly standing out. The yoga line and accessories continues to be incredibly strong for us.”

Day also believes customers had responded well to Lululemon's efforts to bring in more “value” offerings. This including bringing in higher quality product with more technical functionality without increasing prices as well as reducing prices on key accessories to drive traffic. The retailer also increased the availability of items such as tops for layering to standard offerings around the $50 to $70 price point.

“While the recession has created an environment where consumers have primarily been buying on sale, we've gained market share without resorting to markdowns,” said Day.

Finally, the CEO believes the stores are benefiting from community work to drive awareness as well as social media. In particular, the launch of e-commerce in April has “given us a lot more presence and awareness on the Internet which we think has really driven sales with people pre-shopping and going in both in Canada and the States.”

The retailer’s website, which contributed $2.8 million in sales in this its first full quarter of operations, had over 1.5 million unique visitors in the period and an average order value of around $150. The site now offers over 90% of its total SKUs.

The bottom line in the current quarter was helped by stronger sales, improved gross margin leverage on occupancy, and good expense controls.  Of the 570 basis points decline in gross margins, 260 basis points came from the negative impact on product costs associated with the weakening of the Canadian dollar and 140 basis points from occupancy and depreciation deleverage. Another 350 basis points in reduced margin came from strategic pricing initiatives, including the costs to air freight product from suppliers coupled with the use of higher-cost, quick-turn strategies, both designed to replenish products to meet higher sales demand. These were partially offset by 180 basis points of leverage gained from a reduction in costs associated with production, design, merchandising, and distribution departments.

SG&A expenses were reduced to 31.6% of sales from 33.7% last year due to cost savings at its stores and store support center through labor, distribution, and logistics efficiencies combined with reduced discretionary expenses. In addition, the weaker Canadian dollar reduced reported Canadian SG&A costs by approximately $2 million.

The net sales increase was driven by 24 net new open stores since Q2 2008 that offset a 2% comp decline and a weaker Canadian dollar, which had the impact of reducing reported revenue by $8 million or 8%. Corporate revenues accounted for $78.3 million of sales; franchise and other revenues, $12.6 million. It ended the quarter with 115 total stores versus 92 a year ago, and plans to open a total of seven stores during the fiscal year.

Day also elaborated on Ivivva Athletica, its new concept aimed at active young women from 6 to 12. It plans to open three stores this year. Day said prices will be about 30% less than Lululemon's stores. She also said that while Lululemon's positioning tends to focus on yoga/running, Ivivva will “be more of a gymnastics, dance driven maybe even equestrian type of influence.”

Given its sales momentum, Day said the company is rebuilding its inventory levels for Q4 to create the opportunity for positive comps. Third quarter “will still be a transition period where demand could outstrip supply,” which could limit its sales upside. As such, Lululemon is guiding for flat Q3 comps and EPS is expected to range between 11 cents to 13 cents per share, compared with 13 cents in the year-ago third quarter. Third quarter revenues are now expected to range between $95 million and $100 million, up from $87 million in Q3 last year.