lululemon athletica inc. (LULU) Earnings Call Transcript & Summary

Welcome to the 2020 Annual Meeting for lululemon athletica. Our host for today's call is Glenn Murphy, Chairman of the Board. [Operator Instructions] I'll now turn the call over to your host, Mr. Murphy, you may begin, sir.

Good morning, everyone. Sorry, we're a few minutes late. I want to welcome you to lululemon's 13th Annual General Meeting of Shareholders. I'm Glenn Murphy, Chairman of the Board, and like all companies, this meeting is being held virtually. Shareholders will be able to vote online, and we will be taking questions at the end of the meeting. Your full Board, as well as key members of management, are present across multiple locations in North America. The Board consists of Marti Morfitt, Chairman of the Audit Committee; Michael Casey, Chairman of the Comp Committee; David Mussafer, our Lead Director and Chairman of Nominating and Governance. Then we have early Emily White, Kathryn Henry, Tricia Glynn, and a new member joined us for her first annual meeting is Stephanie Ferris. Welcome, Stephanie. And there's one other Board member I'm missing. That's right. And Jon Mcneill. From our management team, we are joined by Calvin McDonald, CEO and Member of the Board; Shannon Higginson, Senior Vice President and Chief Compliance Officer and General Counsel; Erin Nicholas, our Corporate Secretary. After the formal portion of the meeting, Calvin will review our 2019 financial results, update shareholders on growth strategies, and he will share lululemon's commitment to internal change and external action. Now let me turn the meeting over to Shannon.

Thanks, Glenn. [ Richard Leza, Jr. ] of Broadridge Financial Solutions has been appointed to act as our inspector of election for this meeting. Representatives from our registered public accounting firm, PricewaterhouseCoopers LLP, are also attending today's meeting and will be available to answer questions concerning our financial statements during the question-and-answer period at the end of the meeting. [Operator Instructions]. The record date for voting at this meeting was the close of business on April 8, 2020. The secretary has delivered an affidavit of mailing to show that notice of this meeting was given, and the inspector of election has confirmed that a majority of the shares entitled to vote at this meeting are present in person or by proxy. Accordingly, a quorum is present, and the meeting is duly convened for transacting business today. Information on the matters to be voted on at this meeting is included in the proxy statement previously given to stockholders. It is 8:07 a.m. Pacific time, and the polls are now open for voting. There are 3 matters to be voted on at today's meeting. And one of our shareholders, People for the Ethical Treatment of Animals, has given us proper notice of a proposal that it intends to be voted on at the meeting today. The matters to be voted on are as follows. Proposal #1: To elect 3 Class I directors to hold office for a 3-year term and until their respective successors are elected and qualified, and to elect one Class III director to hold office for a 2-year term until that director's respective successor is elected or qualified. The Board of Directors nominated Michael Casey, Glenn Murphy and David Mussafer, each of whom is a current Class I director for election as a Class I director; and Stephanie Ferris, who's a current Class III director for election as a Class III director. Board of Directors recommends a vote for the election of each of these nominees. Proposal #2: To ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending January 31, 2021. The Board of Directors recommends a vote for this proposal. Proposal #3: To approve on an advisory basis, the compensation for our named executive officers. The Board of Directors recommends a vote for this advisory proposal. At this time, we would like to invite the representative for PETA to read the text of their proposal. We will then have 3 minutes to make any additional comments in support of their proposal. Operator, can you pass the line to PETA?

Good morning. My name is [ Lenny Burns ] from People for the Ethical Treatment of Animals. I'm here speaking in support of our proposal that the Board enact a policy ensuring that no products containing down are sold given the cruel and inhumane treatment used for down. For nearly a decade, PETA had shared eye witness investigations with lululemon that have revealed extreme cruelty to birds used for down. They often spend their entire lives in crowded, filthy conditions before they're grabbed by the neck, wings or feet and crammed into crates for a grueling journey through all-weather extremes to the slaughterhouse. At the slaughterhouse, some birds are inadequately stunned before their throat are cut and they're immersed in the scalding hot water of the de-feathering tanks while still conscious. All down comes from birds who are eventually killed in a violent and painful way. lululemon has had ample opportunity to do the right thing and stop profiting from the animal abuse. But it chooses to hide behind standards that have proven time and time again to be virtually meaningless. While adhering to the responsible down standards may make the company appear to care about the expectation of birds, it does nothing to stop their suffering. For example, the standard nearly requires announced visits to down suppliers once a year, which renders inspections meaningless and reveals little about the bird's actual lives and conditions. This standard also allows birds to go for more than 8 hours without access to food or water, and to be slaughtered in view of another. If they require euthanasia because of illness or injury, they may be left without care and allow to suffer for 3 days before being killed. On small farms, access to veterinary care is required only as needed, which means the bird's conditions may not be monitored regularly, if at all. But all this suffering can easily be avoided. lululemon's customers want warm, stylish, comfortable jackets, and because modern synthetics fit the bill, there's no good reason for the company to use down. In fact, down alternatives like PrimaLoft, which the company already uses, outperforms feathers because they're allergen-free, environmentally-friendly and easier to maintain. It is time for lululemon to stop hiding behind meaningless labels and instead authentically connect with the growing demographic of socially cautious consumers. We urge our fellow shareholders to vote in support of this resolution. Thank you.

Thank you for your question and for bringing this to our attention. The issue you raised is an important one, and I'd like to restate what lululemon is committed to. We obtain our down from ethical and humane sources, and we are committed to sourcing sustainable raw materials in a responsible way. This is an important strategy for us, as you know, that will continue to allow us to make a positive impact across our business on a global scale. I'd like to remind you of our code -- vendor code of ethics, which requires our vendor partners to uphold legal, safe and ethical standards of production. We're committed to working with partners who share our values and who source raw materials responsibly, including the company that supplies our down. 100% of our down is certified under the Responsible Down Standard, or RDS, and lululemon is an RDS-certified brand. The RDS describes itself as a global third-party certification that was developed with input of animal welfare groups, industry experts, brands and retailers, and it is administered by the Textile Exchange. The standard can be applied to any waterfall-based company supply chain to ensure humane treatment of animals. In addition, we believe that decisions about the use of materials in our products should be made by our management and design teams rather than our Board of Directors or shareholders. Our success depends in part on our ability to meet and exceed consumer product performance expectations, as well as to anticipate and respond to the product trends and changing consumer demands. If our management and design team are externally restricted in their ability to evaluate and make design decisions regarding the use of materials in our products or the introduction of new products or novel technologies, we may be unable to continue to be a leader in technical athletic apparel innovation. Therefore, with that said, our Board of Directors unanimously recommends that you vote against this proposal.

Thanks, Calvin. Please note, if you previously voted by proxy, you do not need to vote today, unless you wish to change your vote. If you have not previously voted by proxy or if you wish to change your vote, you may cast your vote using the link entitled Vote Now on the right-hand side of your screen. [Voting]

It is now 8:14 a.m. Pacific time and the polls are closed. Based on the preliminary tally provided by the inspector of election, a sufficient number of shares have been voted as follows: To reelect each of Mr. Casey, Mr. Murphy and Mr. Mussafer as a Class I director, and Ms. Ferris as a Class III director; to ratify the appointment of PricewaterhouseCoopers LLP as our accounting firm for fiscal 2020; and to approve on an advisory basis, the compensation of our named executive officers. A sufficient number of shares have not been voted in favor of Proposal #4 to adopt the PETA stockholder proposal, so the stockholder proposal has not been adopted. The final voting results are subject to the final count certified by the inspector of election and will be publicly disclosed in a Form 8-K to be filed with the Securities and Exchange Commission. The formal portion of the meeting is now adjourned. I will now turn the meeting over to Calvin for some brief remarks about our 2019 financial performance. But before he begins, I want to remind everyone that a reconciliation of GAAP to non-GAAP measures is included in our Form 10-K and Form 10-Q, and in our earnings press releases. And also that today's meeting may include forward-looking statements that are based on management's current expectations and assumptions. Actual results may differ materially from those indicated by these forward-looking statements due to risks and uncertainties, including those explained in our Form 10-K and our Form 10-Q.

Thanks, Shannon. I'd like to begin by thanking Glenn and the entire Board of Directors for their vision and the ongoing support they provide to me and the leadership team at lululemon. Given the events of the last week, I'd like to begin by saying that lululemon denounces the unacceptable racial violence and oppression that directly impacts the black community and so many others. As a company, we are committed to increasing our investment in education, behavior change and diverse representation, and calling on our global community to drive positive change into the future. lululemon stands for social justice, equality and inclusion, and we are proud to provide financial support to organizations advocating for change. We donated $100,000 to the Minnesota Freedom Fund, along with $50,000 each to Black Lives Matter and the NAACP and Reclaim the Block. For the remainder of my remarks, I'll discuss how the company has been navigating the current macro environment, the strength of our performance in 2019 and our view of the future. I also look forward to providing an additional update on our business during our first quarter earnings call next week on June 11. Like other retailers, we closed our stores in regions around the world as we navigated the challenges of COVID-19. Throughout this time, the health and safety of our teams has been our highest priority. We provided pay protection to all our employees through June 1, which allowed us to support our people and adapt to the needs of the business. We also focused on our online offerings and maintaining operations within our distribution centers while we created and expanded the digital Sweatlife experiences for our guests. I'm pleased to share that many of our stores around the world have now reopened to serve our guests. We have gradually been welcoming them back to select locations. Our phased approach incorporates key learnings from our successful reopening in Greater China and is being carried out week-by-week, market-by-market in accordance with local government and public health authority guidelines. Through today, we have opened nearly 300 store locations across North America, Europe, Asia, New Zealand and Australia. Over the course of the unexpected events of 2020, I've been consistently inspired by the agility and passion of the people of lululemon and the way in which they navigated this time, created new ways in which we can meet the needs of our guests, and staying focused on taking care of each other and our community. Looking back now on 2019, lululemon delivered a consistently strong performance with total revenue of nearly $4 billion. I'm proud that our net revenue increased by 21% and our earnings per share increased by 28%. We saw broad-based success in 2019, delivering on our 5-year growth strategy, the Power of Three. I'll speak briefly now about the progress made within each of these pillars: Product innovation, omni guest experiences and market expansion. Within product innovation, we leveraged our Science of Feel innovation platform to deliver pinnacle product within our core offerings and also expanded into new and emerging categories. Within omni guest experiences, we saw significant growth across both our store and e-commerce channels. Our agile store formats allow us to tailor experiences within each market, and highlights of the year included the successful launch of our first experiential stores in Chicago and Minneapolis. In addition, our digital channel delivered impressive growth as the investments we've been making enhanced the experiences for our guests. Within market expansion, there is no doubt that the lululemon brand is resonating strongly across cultures and geographies around the world. This is reflected in our results in 2019, including our revenue increase of 20% within North America and our revenue increase of 30% across our international markets, led by growth in Asia and Europe. Looking ahead, I would like to assure you that we have not taken our eyes off the future, and we continue to believe the lululemon brand has a significant runway for growth ahead. While we navigate the day-to-day, we're also strategically continuing to invest in our future. In addition, our financial position is an enviable one. We ended 2019 with over $1 billion of cash on our balance sheet, no long-term debt and an untapped $400 million revolving credit facility. Our financial strength will allow us to emerge from the current crisis as a stronger company and continue to create distinctive experiences, both online and offline and for our guests. Thank you to our teams across the globe, our Board of Directors and to you, our shareholders, for your support and commitment to lululemon. We will now take questions from shareholders. [Operator Instructions].

This is Glenn Murphy, Chairman of the Board. I see we have 4 questions. I want to make sure that I was heard clearly, we had 4 questions. I'm going to start with the last question that came in is, has the meeting started yet? That was at 8:03. So we started a little bit late, as I mentioned. So the answer to that question is yes, and I appreciate somebody was trying to keep us on time. The next question that came in was just before 8:00 and it says, first of all, congratulations on a fantastic company that is the role model of the world. So that goes to you, Calvin, and to the management team. I'm impressed by lulu paying salaries even when stores were closed. People come first. How are you doing with the loyalty program? Calvin?

Thanks, Glenn. I will speak more to our plans in 2020 around the loyalty program next week. But in 2019, as we've shared, we tested in a number of markets, Edmonton in Canada, and a variety of markets in the U.S. And we are very pleased with the early results. Our guests responded in a very exciting way. And as we've shared, we have plans moving forward to continue to expand this program across a number of markets. And that's still our intent moving forward. So we'll share more in the coming week. But in terms of last week -- last year, very excited with the results. Guest is responding, and plans are in place to continue to move forward.

All right. Thanks, Calvin. The next question, which was -- this is a question #3. This question comes from the Connecticut State Treasurer, Shawn Wooden. On behalf of the Connecticut Retirement Plans & Trust Funds and the Human Capital Management Coalition, here's the question. It's a 3-part question. Given the SEC's April guidance on COVID-specific disclosures to investors, has the Board implemented a process for reporting on the financial impact of COVID-19 on the company's balance sheet, revenue, liquidity and executive compensation? Let me just pause there for a second. Calvin, as a matter of fact, after our annual meeting, we have 1.5 day of board meetings and our -- clearly, our Chairman of the Audit Committee, our finance team, and all of us will be talking about a number of different topics, including the impact of COVID-19 has had on our business on some of the key metrics you talked about. And of course, it will be our intention, once we more clearly understand the impact of COVID-19, what disclosure we feel is appropriate. We will always follow the guidelines on disclosure, as we have historically. This is a unique time so we probably just need a little bit of time to understand more clearly exactly what some of the line items you mentioned we will plan on disclosing. But yes, any SEC guidelines, we plan on following. Part 2 of your question, the provision of paid sick leave to its workforce, is that something that we plan on disclosing? And Calvin, I'm going to have to pass that over to you. I'm not sure what discussions we've had on that front.

Thanks, Glenn. Back in March, actually, we -- at the beginning of COVID-19, prior to the escalation and having to close the stores, we proactively changed our paid sick leave, which gave all of our employees around the globe, the ability, if they needed to, to take a 14-day quarantine period and receive full salary protection, as well as introducing paid sick time up to 3 days in addition to other standard offerings that -- other by state or jurisdiction. So we took that position, and then into the closing of the stores, introduced the paid protection, which allowed all our employees to be paid during the number of weeks in which we closed. And as we start to reopen the stores, the paid sick leave policy is in place, and we believe it is a proactive way to ensure that those that are sick and uncertain are able to seek the appropriate medical support and/or stay home and quarantine and not feel the pressure to come into work as a result of needing the pay that we will support them so they can focus on their health.

And Calvin, in fairness to Shawn, there's a third part to his question. I think you hit on some of it in the answer you just gave, but what I think may be helpful to Shawn in his question he's asked, is he's asking the last part, which is workplace health and safety. So you addressed the stores. Maybe just a minute on the work that you've done in our distribution centers, which have continued to operate through this health crisis with COVID-19.

Great. Thanks, Glenn. Absolutely. We have a number of health and safety measures across the business in our stores as we reopen. We've been running under these conditions in our distribution centers now for a number of weeks. And I would tell you a couple of things. One, they exceed all the guidelines that are provided by local authorities. They -- we're in constant conversation with our educators and our employees, ensuring that they feel safe, heard, during this period is paramount for us. And I've personally been to our delta facility to experience and see firsthand these safety measures that the teams have put in place. And proud of the work that the organization and that many teams have done to support each other and continue to support our guests through this and ensure that our distribution centers are able to maintain an operation while protecting the health and safety of our employees.

Thank you, Calvin. I'm now going to get to the last question, which again is the fourth question that we received at the 2020 annual meeting. It's long, so in the interest of time -- I'm acknowledging that it's long, but there is a couple of questions inside of here that I'm going to get to the purpose beyond the question then read the 2 questions. At the 2018 lululemon Annual Meeting, Glen Murphy spelled, with one n, as Co-Chairman, and David Mussafer, under the scrutiny of Legal Counsel, Michael Hutchings from DLA Piper, lied when he said there was only 2 shareholder questions, when in fact, there was a minimum of 4. This is ground we've covered before, and you can see, we're really being very careful with virtual meeting to make sure we hit every single question, identify the number of questions so that there's no confusion. And this was 2 years ago. But there is 2 questions based on that statement. Given the preface, that's right, provided, what does lululemon propose to do to increase transparency and improve integrity in publishing and answering shareholder questions at the virtual AGM? Well, I think we accomplished that in 2019 and again today, that as you go through these virtual meetings, there's always lessons you learn. And one of the ways to learn is to make sure that we are covering every single question, identifying the number of questions, which we've done today. But I think we've obviously, based on the question, improved our integrity, if that was ever a question back in 2018. But clearly, we've improved our processes to make sure that all questions get heard, and this is the question. This is the part one question from the shareholder. Part two question from the shareholder. Given the preface above -- provided above, since the appointment of Glenn Murphy and David Mussafer as Co-Chairs, what do you estimate the loss of market cap caused by inefficient operating procedures when employees assume the Board of Directors is lying to them? So I'll take the second part first. That's just not true. I'm very close to the employees in the company, whether who work in stores, our distribution centers, our call centers, our management team and the SEC, and we have a lot of communication from the Board into management, into a lot of employees. And I can say, categorically, there is no understanding inside of our company that the Board of Directors lies to anybody in the management, SEC, store-based educators or people who work in our distribution centers. The second part, though, which is actually more interesting is the loss of market cap caused by inefficient operating procedures. The only number I carry with me is in 2015, David Mussafer, who is the Chairman of Advent International, acquired a significant stake in lululemon when the market cap was $5 billion. Today, and today is only 1 day, and stock markets are fluid, but today, the market cap of lululemon after 5 years of David Mussafer and others being involved in the Board, surpassed $40 billion. So I don't think that's the definition of inefficient operating procedures. Operator, that was the last question of the 4 questions we had today at the 2020 lululemon Annual Meeting. On behalf of the Board, I want to thank Calvin, I want to thank the management team, I want to thank our educators, I want to thank the unsung heroes in our distribution centers and all lululemon employees for their incredible work in 2019. But more importantly, on behalf of the Board, how they've handled themselves and conducted themselves through these incredibly challenging times in 2020. We are very, very proud of our team. The 2020 lululemon Annual Meeting is now adjourned. Thank you very much.

And that concludes the meeting. Thank you for joining, and have a pleasant day.