Lululemon Q2 2012 Earnings Call

Today's earnings call was quite interesting with mention of the quality issues twice,  during the call and in the question and answer period. Comments on the factories and our speculations that they have picked up new factories which they decline -stating only that these long term factories are simply having to grow and finding new innovations in garment production to keep up with the demand. The intellectual property law suite was brought up as well as I'm sure investors are wondering why they are embarking in a costly and unprecedented suit for the fashion/garment industry.  It will be very interesting to see what the judgement is on that suit as it will have a huge effect on the fashion industry which is built on borrowing of ideas from high end designers (good artists copy, great artists steal!). I firmly believe that the only reason Calvin Klein was the chosen one for that posturing was because of the name recognition attached to that brand. So many other companies have done what Calvin Klein has done, and better. 

An interesting question they received asked them to elaborate on the quality issue they were having. They focused on addressing primarily the issue of leaching fabric dyes and none of the other quality issues we've seen, and admitted that the issue was that they chose to use bright neons which are known to not dye fabrics well, and they earnestly pushed the envelope on how far they could go with these dyes. They hired a color expert (from Speedo I believe) and were able to find solutions to the troublesome dyes by incorporating different washes and finishes (stinky clam digger issue?) because they were set on providing these colors (no matter the cost to the customer I guess). So while they had a great trial and error () learning experience that allowed them to see how far they could push the color envelope (really? neons push the color envelope? funny that you can find non leaching brights and neons elsewhere for a fraction of the cost - but ok) us customers where having to push for our quality concerns to be acknowledged and having to argue and plead for refunds. So it appears they knew all along they were pushing the quality envelope with these dyes but where really hoping we would not notice that for as long as possible until facebook complaints became fever pitched and they had no choice but to make a statement and change their handling of individual customer complaints. Where is the good will towards the customer here?? Figure out how to make color fast neon dyes BEFORE you put the product out for mass market. Why is it not possible to dye bolts of fabric before the garments are constructed and test those fabrics for wearability? Why must your customers be collateral damage in your innovations? I have to say that stores are indeed handling quality returns much better over the past 3-4 weeks and taking items back very graciously after their vague statement on facebook and this 'Our Quality Standard' statement on their website.

Another question that came up was whether Lululemon was focusing more on the fashion aspect of their garments rather than the athletic capabilities with the increase in capsules over producing core items. Such a great question to which Christine replied that they were firmly committed in creating athletic garments that convert to street wear like no other company has been able to do. I agree with her to a point that this is what has made lululemon so great and why we love it so much, but I hope they don't venture too far into the fashion world at the sacrifice of the athletic integrity of the garment. Because at the end of the day, as fashionable as lululemon can be, most of us are using it primarily for our athletic and sweaty endeavors and for the occasions where we can 'get away' with wearing our athletically designed urban street wear...but they do not translate across the board in our lives. What I keep coming back to over and over again are the technical core pieces I use for working out in, the urban street wear factor is strictly a luxury

Here are some of Christine Day's comments from the introduction:

Being in relationship with our ambassadors and our guests gives us the opportunity to host and support these events and is a testament to the meaningful relationships that we have built over time. It is precisely because of the strength of those relationships that we take -- we took a clear stand, with a letter from Sheree on our Facebook site, regarding quality issues. We strive to exceed the performance needs of our guests, and we usually succeed. However, we were hearing that this was not the case with color integrity on some of our products this spring. And when guests felt like we were not owning up to the issue, we reacted appropriately in our stores to ensure that our guests were heard and their concerns were addressed, and shared this with our loyal guests on Facebook. As you have seen the results of this quarter, it was not a material event from a pure financial perspective, and engaging in an honest discussion with our guests is always the right thing to do.

We have always made feedback from our stores and our communities a core practice that we use to evolve our products as we grow. Our products are created using the highest quality suppliers and factories, many of whom have been with us since the start and have grown alongside us. And while it is a product made by humans and therefore not always perfect, we will do what it takes to make it right when we fall short. In the end, quality is our key differentiating factor. It is what we stand for and what we will always stand behind.

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Just before I pass the call over to John to review the numbers, I want to take a moment to address a question that we've been getting a lot lately regarding others' attempts to copy lululemon. In some respects, this is a tremendous compliment, as the saying goes, "Imitation is the sincerest form of flattery." However, while others may try to mimic parts of our business, it is impossible to copy a personality. We have built the #1 retail apparel business model of any publicly traded company, and we continually strive for the right balance between delivering strong growth and our market leader focus on innovation and execution.

We are also in the fortunate position to have protected our IP, having built up a portfolio of classic styles. And when we see attempts to mirror our product, we will take the necessary steps to protect our assets, as we did recently by filing a patent infringement action related to our Astro Pants.

Most of all, we will support our people and our communities to reach new heights, as they did across the board this past quarter. We remain confident in our ability to lead the market in our segment, with our growth plans unaffected by changing market dynamics. Our focus continues to be on our own internal capabilities, innovation and investment in our future. Our primary focus for innovation is evolving our product incrementally as we have been doing through fit, function, fabric and fashion detailing. The base business is incredibly healthy. It is a tremendous proven growth lever, and we have a long runway ahead of us.