WHEN: Today, Friday, July 22nd
WHERE: CNBC's "Squawk on the Street"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Lululemon CEO Laurent Potdevin and CNBC's Sara Eisen on "Squawk on the Street" (M-F, 9AM-11AM ET) today, Friday, July 22nd. Following are links to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000536859.
All references must be sourced to CNBC.
SARA EISEN: So thank you for doing this.
LAURENT POTDEVIN: Thanks for having me.
SARA EISEN: Take us back to January 2014 when you walked into this company. What was it like?
LAURENT POTDEVIN: You know what, it was the trifecta. It was the role that I've been working for my entire career. When you go back to studying at Louis Vuitton with vertical retail, luxury craftsmanship, and then 15 years in the snowboard industry, you know, and performance product and going from a small sport to an Olympic sport. And then TOMS really focused on social impact, felt like Lululemon, as a brand, that was the innovator, audacious, courageous, created a market. Allowing me to get back to performance product-- was the dream job. And so I inherited this amazing brand, amazing group of people-- and a brand that has grown very, very quickly and where the investments had-- lagged behind the growth. So the past few years have been really about rebuilding the management team with a lot of promotions from people that have been with the company for a long time. And new people, added new talent, building a foundation and a supply chain and an infrastructure that can support the scale and the complexity of the business.
SARA EISEN: What about the troubled times that you walked into? How did you win back trust from the pants didn't work for some women's bodies comments--
LAURENT POTDEVIN: You know what the first focus was focusing on the guests. And really doing what was right for the guests. So they, you know, we had some tough patches and every brand that's growing quickly has them. And my first task was to really focus on the guest, and make sure that the guest knew that they could trust us, they could be loyal. And whether it was building an amazing quality department and structure, or being a lot more flexible with our return policy, it was all about making the guest right.
SARA EISEN: So now that takes us back to now. And you have proven that you are withstanding a very tough retail environment, especially holiday last year, and first quarter this year. Why do you think that is? Why are you bucking the trend?
LAURENT POTDEVIN: It's a combination of two things. I mean, I think that, while the athleisure trend has grown exponentially, and everybody wants a piece of it, we are still in a very unique position. And so you've got athletic brands that are mostly a wholesale business, that don't have the margin structure that we have, and that don't have access to the same quality of construction that we have. And then you've got the fashion brands that don't have a technical mindset. And so we sit right at the intersection of-- function and fashion in a beautiful way. And on top of that, you've got amazing product and then you've got the guest experiences that we know are second to none in our stores. And I think that in rough times, you know, the connections that are our guests-- I mean, we call our consumers our guests. The connection that our guests have with our educators is really powerful. And that's a huge asset in creating the effortless loyalty that we see with the brand.
SARA EISEN: What is the process there? What why is your innovation different? And why is it winning in a period where even competition in athleisure, like Under Armour or Nike, are running into some hiccups?
LAURENT POTDEVIN: Well, I mean, like I'll go right back to, you know, the vertical model that we have allows us to control every transaction. For every interaction that we start with our guests, we create it. And that's a huge part. And then from an innovation standpoint. I mean, the vertical model gives us a margin structure that really allows us to play with that invest in innovation, and then play with fabrics and raw materials that are like second to none.
SARA EISEN: So are the higher comps, higher-than-industry comps, sustainable, repeatable?
LAURENT POTDEVIN: Think as long as we innovate, I think it's very sustainable. If you look at the trend of take athleisure out and look at the lifestyle of being athletic and mindful, that trend is going to continue to grow for a long, long time with men's and women's around the world.
SARA EISEN: You don't see it as a fashion fad?
LAURENT POTDEVIN: Athleisure, that bubble will pop and the people that are not in it for the right reasons will go away. And the trends or the lifestyle of being athletic and mindful will stay. And that's the market that we lead and that we're really passionate about.
SARA EISEN: You've also focused, and you've mentioned it a few times now, on improving the profitability of the company. How much more scope is there for that?
LAURENT POTDEVIN: You know what we've done it's been a huge body of work for the past couple of years. We still have about you know, we're probably like 80% of the way through. But we've started-- we've started seeing margins expand and profitability grow. So the last two years have really been a very strong period of investment while we've been focused on the guests, product innovation, and quality. And now we're actually seeing the benefits of our work with margin expansion and profitability expansion.
SARA EISEN: Why do you think it's such a battleground stock?
LAURENT POTDEVIN: It's an emotionally charged brand. People love to love the brand. And I think that's really all there is. It's a very unique brand.
SARA EISEN: Some people love to hate the product though, and they'll say perhaps, "They can only do yoga and training. They might not be able to expand into other categories."
LAURENT POTDEVIN: Well, I was just reading a statistic that was actually really interesting. And I don't quite remember what the percentage was, but there was a much higher percentage of runners at the Boston Marathon finishing under three hours wearing our product. And those are pretty good runners.
SARA EISEN: Do you have ambition to go into other categories? Are we going to see Lululemon one day in the NFL like some of your competitors do?
LAURENT POTDEVIN: I don't think you'll see us in the NFL anytime soon while despite the fact that NFL, NHL players love our product and live in it. But, you know, we just launched our partnership with Kennedy in men's and women's team for beach volleyball on their way to Rio. And we built the most innovative kit for them. And we're also supporting the men's team out of Huntington Beach on their way to Rio. So you could you'll definitely see us growing different categories, always focused on innovation and really starting at the high end of the market.
SARA EISEN: I'm just going to go there with pricing. The price points are certainly above average. MKM estimated 24%, 34% on cropped yoga leggings. What makes you think you can keep that up?
LAURENT POTDEVIN: You know, as long as we deliver innovation, as long as we deliver value to the guest, and as long as we solve problem and we allow them to perform with no distraction, we've never seen any resistance on pricing. And I think it goes right back to the craftsmanship, the construction, and really the raw materials that we use that are very differentiated.
SARA EISEN: But doesn't it worry you that we're in an economy where T.J. Maxx and Ross stores are some of the best performers right now in terms of results in retail?
LAURENT POTDEVIN: Well, I think if you—
SARA EISEN: These leggings are $98, I just checked.
LAURENT POTDEVIN: You know, if you're in the lifestyle apparel, you're a commodity. But I really look at this us a technical brand, technical brand that sits at the high end. And we invest heavily in innovation. And people value that quality, that innovation, and how it allows them to live the lifestyle that they love.
SARA EISEN: What about the competition right now? A lot of people compare you to Under Armour, to Nike. Who would you say is your biggest competition?
LAURENT POTDEVIN: You know, I always go back to I think we actually we don't have a lot of competition. I don't spend a lot of time looking over my shoulder because we continue to innovate. And in the categories that we are in, we continue to lead both in men's and women's. So I'll go back to you've got the athletic brands, you know, that have that know how to work with athletes but that are wholesale brands that clearly don't have the same margin structure to develop the product, and that don't control the experiences with their guests. And then you've got the fashion brands that really don't have a technical mindset, using the athletes to really develop products and solve problems to allow them to perform better. So I really think that we sit in a very unique position, both as a result of the experience that we create, but also in how we marry function and fashion.
SARA EISEN: And we were talking about making sneakers, making shoes. Is that something that you want to do one day?
LAURENT POTDEVIN: Well, I see so much runway with the product that we're very good at. It's a market that's very crowded, that is actually mostly a wholesale market. And so right now, the sky is the limit with what we do very well.
SARA EISEN: What about men's? That has been a key part of your story. How much more of a growth driver is that in the coming year?
LAURENT POTDEVIN: Well, we see the men's category as we see it as a billion-dollar franchise, you know. I mean, we know that when the guys try our product on, they love it. It goes right back to the quality of the product. And we're really anchoring our men's business in the sweat category. So whether it's our pace breaker, our metal vent, I mean, that's really the product that we want the guys to know us for.
SARA EISEN: More ABC pants?
LAURENT POTDEVIN: More ABC pants. You've got to love your ABC pants, you know. You can get on the red eye and again, it's functional, right? It's got two-way stretch, moisture wicking. You can get on the red eye, wake up in the morning, not being wrinkled, and go straight to work. Or ride your bike to work.
SARA EISEN: What about the international expansion, which is another sort of key part of your strategy, focused on Asia and Europe? How do you build brand awareness in those markets?
LAURENT POTDEVIN: Think the way we build brand awareness is actually going to be very similar to the way we've done it in other parts of the world. So our model is to build showrooms which are smaller-format stores. And then the store manager and their staff actually, they get involved with the community. So they get involved with the local studios. They get their finger on the pulse of what activities are relevant in those markets. And usually, when we see a certain revenue in those stores, we know that we're ready for a store rollout. So it's really we wait until we're being pulled by the community rather than push ourselves on the community. And that's why, out of our 370 locations we have you know, we only have good locations that are very profitable. So we're patient. We build really authentic relationships in the communities. And when we're ready, we actually come in. And that's what we're doing internationally. So we've had showrooms in Hong Kong, in Singapore, and we've triggered store rollout. And today we've got two stores in Hong Kong, two stores in Singapore, a store in Seoul, a showroom—
SARA EISEN: How are they doing?
LAURENT POTDEVIN: --in Tokyo. And they are doing fantastic. You know, the I.F.C. store in Hong Kong, right across from Apple, is doing so far close to $7,000 a square foot.
SARA EISEN: So double digit growth.
LAURENT POTDEVIN: Yes.
SARA EISEN: Internationally.
LAURENT POTDEVIN: Yes.
SARA EISEN: Are you still on target, aiming for quarter of the business?
LAURENT POTDEVIN: We're on target with our five-year plans, absolutely. I mean, we've you know, we've declared that, within the next five years, we'll actually double our revenue and more than double our profitability, and international will be a big part of that equation.
SARA EISEN: What about technology? How do you think of that? A lot of the athleisure brands are really looking at ways to get into wearables, and build technology into the sportswear.
LAURENT POTDEVIN: I think that's not necessarily a huge area of focus for us. I mean, we really focus on raw materials, on fabric and we're not a technology company from a wearables standpoint. Now, we're really passionate about mindfulness. You know a big goal for us is for people to develop their peak performance through mindful performance. And we're definitely doing a lot of research with a couple universities to allow people to have their mindfulness practice, whether it's meditation or yoga or any other, and really measure the impact of that practice.
SARA EISEN: How do you design clothes for meditation?
LAURENT POTDEVIN: You know what? Meditation, you can meditate in number of ways. But you want to be comfortable. And so I go back to some of our softer fabrics. But I would think also the meditation can take a number of forms, right? If you think about the eight limbs of yoga, I mean, the practice of yoga is a form of meditation. And that's where our new fabrics like Nulu you know, a lot of yogis said, "We want coverage and we want to feel naked." And that's the origin of our Nulu fabric which gives you that sensation of being naked and have your practice without any distraction—
SARA EISEN: So is that what you mean by premium products premium ha—
LAURENT POTDEVIN: Absolutely.
SARA EISEN: --raw materials? I mean, do you not worry at all that some competition's just going to come in and undercut on prices?
LAURENT POTDEVIN: No the investment that we make in actually developing those raw materials and having them exclusive really gives us an advantage that is difficult if not impossible to replicated short-term. A good example would be our anti-stink fabric that we use. You know, where we've got exclusive partnership on how we put the silver thread for anti-stink in our metal vents or Swift fleece products.
SARA EISEN: What innovation are you most excited about right now in the company?
LAURENT POTDEVIN: We've got a couple of things. I mean, we've got some really interesting projects in outerwear. We've got this one jacket that's coming that's actually made out of one piece of garment, so there's no seams and no tipping which will make it very light-- but also waterproof and with no bulk. We've got some abrasion shorts that are incredible for the guys at the gym. And more recently, I mean, I think that what we've done for the athletes going to Rio both on the women's side with what we've done with the bras and for the guy's side with the board shorts on how to get rid of the sweat and the sand I thought was incredibly innovative.
SARA EISEN: So are we going to see more from Lululemon like the Olympics, on a bigger scale in front of a bigger audience?
LAURENT POTDEVIN: I think where it makes sense. We're going to continue – we're very focused on our grassroot model. We think it's incredibly powerful. We love it. So don't expect to see us endorse big teams around the world anytime soon. But when we can have a difference with athletes that have been wearing our product for a long time and support them in enhancing their performance, you'll see more of that.
SARA EISEN: And when you say "grassroots," are you talking about the yoga community?
LAURENT POTDEVIN: No, not at all. I mean, grassroot could take it could be a local surfer. You know, it's really the local heroes. Like when you're a store and you've got your six ambassadors they could be triathletes, they could be a runner or they could be CrossFit, they could be a yogi. There certainly are a number of yogis. But they're the local superheroes that are really the inspirational figure in that community. So in Australia, it could be a surfer and a triathlete. And in New York, it could be the class or a yogi.
SARA EISEN: What is Chip Wilson trying to do right now?
LAURENT POTDEVIN: You'd have to ask him.
SARA EISEN: Well, we did ask him. He had a very contentious interview with Jim Cramer recently on our air where Jim is defending you and defending your comps, and he was arguing that Lululemon has lost its way and should be valued at double Under Armour.
LAURENT POTDEVIN: I would argue that actually Lululemon has found new ways. You know, and Chip hasn't been involved with the company in any way, shape, or form for over two years now. And as the founder and as a shareholder, he's certainly entitled to his own opinions, but we strongly disagree. We've put out a plan, you know, of doubling revenues by 2020 and more than doubling profitability. We've reignited innovation. We've got an international strategy. We're building a digital culture. And we're very much on track to deliver on those targets with an engagement and a workforce engagement which I'm so proud of. Because we're seeing the lowest employee turnover that the company has ever seen since 1998.
SARA EISEN: But is that a distraction to you, to have a founder who still owns, what, 14% of shares outstanding making noise like this and trying to get board changes?
LAURENT POTDEVIN: Again, I mean, I'll go back to the fact that he's had no involvement for over two years. So it's noise and I would certainly wouldn't call it a distraction.
SARA EISEN: There have been questions also about the board and some of the board members. Your longest-serving member, Rhoda Pitcher, who TheStreet.com was chasing for a long time and didn't find much. What can you tell me about her and her future on this board?
LAURENT POTDEVIN: You know what? I mean, I've known Rhoda for three years. I mean, she was obviously a big part of bringing me on board. And she's been the chair for our nominating and governance committee. And Rhoda's got a very deep understanding of our culture. And she's actually been a great support in building the management team that I was able to build over the past two years. So I think that, you know, the insight, the intuition that you have on people combined with her deep understanding of the culture was an asset for me. And I'm really grateful for that impact.
SARA EISEN: So she stays, despite the mystery—
LAURENT POTDEVIN: Absolutely.
SARA EISEN: --and the controversy surrounding her identity and her experience.
LAURENT POTDEVIN: Absolutely.
SARA EISEN: So can you give me three reasons why $98 is a good price to pay for leggings?
LAURENT POTDEVIN: I think it really goes back to the raw materials that we use. And even I mean, our leggings go from probably $82 all the way to $148. Right? So $98 is in the middle. It's this one right here. But it depends on the fabrics that we're using. The construction that we use. And it really goes back to the value that we deliver to the guest and the amount of innovation that we put in the product.
SARA EISEN: And what does Lulu look like in ten years?
LAURENT POTDEVIN: It's a global iconic brand. It knows its guests around the world very intimately and authentically by having built a digital ecosystem that is really powerful. It's a men's and a women's business and it's known for both gender, and it's across many, many categories. Always pushing innovation driven by function at the top of the – at the high end of the spectrum in terms of positioning.
SARA EISEN: And I know tax inversions are a little more difficult to do in this country now, but what do you say to always this speculation that Lulu's going to get bought out?
LAURENT POTDEVIN: Well, the more we perform, the harder it's going to be.
SARA EISEN: Because the more valuable you're going to be—
LAURENT POTDEVIN: Absolutely.
SARA EISEN: --and the higher your stock price will go.
LAURENT POTDEVIN: Yes.
SARA EISEN: And what do you say to someone who looks at a 30 times earnings company and says, "Fully valued, growth priced in"?
LAURENT POTDEVIN: I think when you look at the runway that we've got ahead of us, you know, when you compound, like, the innovation, the categories, the men's business, building the digital culture, and rolling that on a global scale, we've got tremendous runway.
SARA EISEN: Great. Thank you so much.
LAURENT POTDEVIN: Thank you so much.
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