Global Retailing Conference 2016- Carlos Alberini, Chairman and CEO, Lucky Brand

Thank you, Don. I appreciate those nice words. There is a very old saying: If you're going to make a presentation, make sure you are not the guy between the audience and the martini. I happen to be that guy. On top of that, coming after someone who analyzed the industry and has ten new things that people are doing, it's a very challenging position. I could relate to the one about the Audi app—my kids invented that not too long ago. Anyway, thank you very much for having me. I'm really excited to be part of this and thank Terry for everything you do for all of us. What an amazing center—this is my first time here, but I'm so impressed by the level of the talks and everything we are experiencing here. So thank you for having me. I wanted to share some of my experiences. I call this little talk 'The Power of Strategy and Brand Transformation' because during all my years doing this, I think I discovered that brand transformation and strategy can really create tremendous value for companies and brands across the globe. In my experience, this has definitely been the case. I'm going to spend some time giving you some of my background—you heard a little bit from Don—and then talk about the power of strategy and brand transformation for Lucky Brand. I'll talk about the business we inherited, our key learnings during the two years we have owned the brand, and then our strategy and how we really developed it.

I'm not going to spend a lot of time here, but clearly I'm not from around here. I'm Argentinian, born and raised in Buenos Aires, Argentina. I joined Price Waterhouse right out of school—at the time that was the thing to do. I thought I was going to be there for only a couple of years, just to train and learn about projects and so forth, but that became a pretty long and great career within Price Waterhouse. I was there for about seven years, and then they transferred me to the States. Initially I was going to be here for only a couple of years, and here we are. I have a wife, Andrea; we have been married for 32 years. That's how I convinced her to come—it's only a two-year thing—and here we are. I had an amazing experience at Price Waterhouse. After that, I joined one of the firm's clients at the time—the company was The Bon-Ton Store. I spent about eight years there. We took the company public, so that was my first real contact with the public company environment in the US, and it was an incredible experience. But I was still on the whole financial side, and general management was a dream of mine. I always wanted to run a company someday. So from Bon-Ton I joined Melville, and here is where the power of brand transformation started.

The first big project I had to do was a project about unleashing shareholder value—you may remember those terms. This was back in the mid-90s, and what we needed to do was identify a way to really let CVS stand on its own so it could participate in the big mergers and acquisitions world that everybody was anticipating. That was great vision. I was only part of the team, but that was a huge strategic move, and we were able to do that. At the time, Melville had 12 different divisions—billions of different businesses—and the analysts and public investors didn't even want to bother owning the company because it was so difficult to understand this big conglomerate. Letting the company stand on its own was key to the success, for CVS to be able to participate in that big consolidation process that took place in the industry. Boy, were they right. When you think about what happened during those 20 years, CVS became a mega company just by acquiring and playing a key role in that consolidation. After that, I joined Guess. At Guess I learned a lot about strategy as well. The Marciano Brothers, whom I consider great friends, were very strategic from day one. This was probably one of the first companies that really started shaping the idea that we could be in the wholesale business but also have an opportunity to expand distribution through our own stores, to really augment that experience with the consumer. Today it feels like everybody does that, but at the time we would go to investor meetings and they'd tell us, 'Shouldn't you just get rid of the wholesale business and be a vertically integrated retail company like The Gap?' We always saw this opportunity as very synergistic. Having a big business in wholesale and a big business in retail were completely synergistic, and if anything they were enhancing the experience for the customer.

After that, I joined Restoration Hardware. We did an incredible job redefining that brand—a brand that had no significant clarity in its business model prior to when we started really changing the brand to be more of a home style and big furniture, accessories type of business. We saw an opportunity there to put the customer at the center, go into different ideas of rooms of the home, and that's how we ended up increasing the size of the company in a pretty significant way very quickly. The company now is doing over $2 billion. When I joined in 2010, total sales were about $600 million, so it happened very quickly. When I was presented with the opportunity to come to Lucky Brand, it was a big opportunity to really go after that with a team that was very committed, a very young team. I'll tell you a little bit more about that later. We felt that Lucky Brand was always a great brand—very clean distribution—and a brand that had been around for almost 25 years at the time, but it had lost some relevance. We thought we could do some things to re-energize the power of the brand. I'm going to take you through some of the things we learned and how we developed that strategy.

I told you a little bit about Rosiris—married for 31 years, I have five kids. I put this on purpose because when I talk about what I do and the power of strategy and everything we do at work, I think that those who stay home or help us every single day have a pretty significant part of that. Here's my family. My wife is Andrea right there. We are a very fortunate family. We don't have much in the US, but this is what I have and I'm very proud of it. Okay, so let me talk about the power of strategy. The company was founded in 1990, and these were two entrepreneurs with a very big dream. They had some experience in the denim business, but at the time fashion denim was not something people were familiar with. These guys had an idea and they went after that dream. The company took off very quickly; the brand became very cool in those days. I hope most of you are able to relate to the brand itself. At some point they wanted to sell, so they sold to Liz Claiborne to get significant funding. The company started growing, and then things went sideways in terms of management. Kate Spade, which was the successor to the Liz Claiborne organization, decided to dispose of all the different businesses they had. Lucky was the last one they had, right after Juicy Couture. We bought it in 2014. This was a big opportunity for me personally. We did it with Leonard Green, a big private equity firm. We took the first year and said, 'This is a year where we're going to learn.' So we learned a lot about the customer, the culture of the company, the people, the team—we made significant changes. We learned about the product, the real estate, and we discovered a lot of things that were somewhat counterintuitive. We learned about the brand, the elasticity, the range that the brand had. Based on all those learnings, we created a framework to go after that whole strategic vision for the brand. In 2015 we put a lot of those key strategic initiatives in play. The idea was to validate those, so we called that year the 'Year of Validation.' Employee engagement was a big thing we wanted to accomplish. Assortment expansion—we felt there was a big opportunity to really expand the assortment and the business. I'll tell you more about that. Omni-channel—that was something the company had not pursued prior to that moment. Every single channel was being run as an independent channel, and we saw an opportunity in that. We saw opportunity in real estate and to design a new concept store. Financial performance, and last but not least—because the company was part of a larger organization, we had to create our own infrastructure, and we had a very limited time to be able to do that.

The business is well balanced. Wholesale represents about a third of the business. Specialty, which is full-price stores, represents another third. The remaining is between an outlet business that has about 84 doors today, and we have an e-commerce business that is growing at a faster rate than the rest of the company but represents almost 10% of the total business. One of the great things about this brand is that it's been very successful in getting out of being just a denim brand and becoming more of an apparel lifestyle brand. There are a lot of denim brands that try to make that claim, but not many have done it to the extent that this brand has. We have 175 full-price stores. We operate in over a thousand doors in the wholesale business—so we have retail partners with over a thousand doors that carry our product, and in addition we have specialty doors, about 375 of those. Another good thing about the balancing is that every single channel has a meaningful business, except for international. We see an opportunity for international that could grow over time. The company last year did less than $600 million in total volume, but when you convert those sales—which is a mix of retail and wholesale—into what the customer pays at retail, that number is about double: $1.147 billion last year. We have a big licensing business as well, which is part of that. When you look at genders and the type of product we sell, there is also significant balance. Denim represents slightly over 40% of everything we sell. We like that category; we think denim is here to stay and it's a very strong category. The margins can be very compelling for that business, but we also have a pretty significant presence in apparel and accessories outside that denim world. This is true for both men and women. The women's business represents between 55% and 70% depending on the channel, with the remaining being men's business. We think that balance is an important part of the strategy we selected.

How did we approach the transformation? We started with the customer. We said, 'We need to learn about the customer. How is the customer related to the brand, and how do we make sure we can capitalize on those things that are good for the customer, but also look at things we need to adjust to really get a better answer?' With all those findings, we went into the product and said, 'If we took all those learnings and put them into the product, what would we do with the product, with the line, with the type of product, with the assortment?' After that, we said, 'How are we going to tell the story?' Because the brand has been around for a long time. The customer might walk by a mall, see the Lucky store, and expect things were the way they were, but this brand is not relevant to them anymore. So how do we really tell that story to change the perception of the brand? Last, and very significantly, we saw an opportunity to really integrate everything we were doing through the different channels to tell the story with one voice. We called it 'One Customer, One Channel Experience'—stores and online. I'll tell you more about what that means. I have five learnings I'm going to share with you today. The first one: The brand has tremendous awareness, range, and elasticity. This was a big surprise to us. Lucky Brand's awareness level among women is about 77%; among men, that number is 58%. When you think about the size of our company—a $600 million company—compared to other brands that have that type of awareness levels, we think we are in a very good place. The challenge will be to re-energize that brand to become more relevant, as opposed to trying to convince everybody that there is a brand and this is what we do. We were very excited to learn about this. The brand has always been founded and grounded on four pillars: first, music—rock and roll; second, Southern California lifestyle, very casual living; third, about moto and that whole rebel leather jacket vibe; and fourth, vintage Americana. We see this as amazing because these are all pillars that were very relevant back when the brand started, but they are as relevant today and they cross generations. If you take my kids, I see they have tremendous interest in most of these pillars, as we do as a generation. Also, these pillars are relevant on a multicultural level. In Europe, people enjoy auto racing and moto as a whole. World music—who doesn't like music? Vintage is definitely something that has become much more relevant as well. And who doesn't want to live in Southern California? Of course I had to say that.

The second big learning is about the customer. The customer has significant disposable income, is extremely loyal to the brand, and embraces Lucky Brand for other occasions. Let me tell you what that means. 57% of these customers have incomes over $80,000. Of course, if you're talking about New York City, $80,000 doesn't take you that far, but when you think about the entire country and the distribution we have—which touches the entire country—that type of income level is very compelling. About 79% of the customer base is 35 and older. At first we saw that as a challenge, but at the same time we see a big opportunity because that customer is also very affluent, very actively involved in multiple occasions, highly educated, and they have significant loyalty to the brand. We put all that together and said, 'Wow, this is a very big opportunity.' It's always easier to sell more to customers who have already voted and said, 'Yes, I'm loyal to that brand, I like it,' than trying to capture other customers who didn't express that kind of interest. We did some customer research right after we acquired the company. We asked a simple question: 'When you buy our products, do you wear them for weekends?' The answer was yes—85%. Obviously it's a casual brand, so the lifestyle is conducive for that type of occasion. Then we asked, 'How about going out?' The numbers came down for both men and women. 'How about going to work?' The numbers came down further. That wasn't much of a surprise. Then we asked a second question: 'If we made product for those other occasions, even for casual wear, would you buy more from Lucky Brand?' For weekends, the answer was no—basically the numbers were exactly the same. The customer was saying, 'I am buying as much as I will buy from you.' But when we asked about going out and going to work, the answers went up significantly. We thought, 'Wow, this is such a huge opportunity for us.' So we embedded that knowledge into our strategy, and I'll get to that.

Key learning number three: Multi-channel distribution is powerful, synergistic, and delivers high ROI. There are a lot of numbers here, but basically we make money in every one of our channels. The key is that the more we synergize between the different channels, the more money we can make in each one, because most of the ideas and initiatives we are putting in place work for every one of our channels. One good example is assortment expansion. The fourth learning is about where the customer was. We did a lot of research about where that customer that looks like the one I just mentioned is located. The research suggests that there is an opportunity to nearly double Lucky Brand's distribution. But we must be very careful with where we go with the expansion, because we saw that stores located in Middle America—and the same is true for the rest of our channels—are much more profitable markets for us than the coastal markets. The main reason is that occupancy costs are so prohibitive in coastal states. We use a company called Blackstone. These people analyze the entire census of the country and segmented the entire population into 71 segments. Segment A1, for example, is 'American royalty'—people who live in suburbs, very affluent. The next one is A2, a different type of group. A3 has kids, and all these different attributes have been completely analyzed by segment. The great thing is that we have enough data to know where every one of these households is. When you look at this chart, the green line that goes across shows the penetration of that particular segment in the trade area we were looking at. In the first one, A1, less than 2% of the households are A1s in the trade areas we were looking at. The red line represents our customer as a percent of our total customer base and sales. In our case, A1 represents almost 9% of our customer base. In every one of those cases where you have reds, those are what you would call the primary core customers for Lucky Brand. This is another big learning for us. We now know that we are dealing with people who have significant affluence and a lot of disposable income, but they also have certain characteristics that we think we can feed into with our expanded product line. When we look at the total, there are about 119 million households in all segments from A1 to S71. Of those, the people that look like the red ones are about 37 million core customers. We were servicing only 20.8 million, so we see a big opportunity to go into a big expansion in distribution. I mentioned this before, but you can see the profitability for our four walls—in stores in coastal markets it's about 900 basis points below what we see in the middle of the country.

The fifth and last learning is about operational excellence. By necessity—because we needed to create an infrastructure and didn't have the resources to do it—we had an opportunity to do this with third parties. We were able to optimize the use of our capital to create this new infrastructure, but more importantly we were able to go into systems that are significantly more user-friendly, easier for millennials, and we did it very fast. We operate most of our systems in the cloud now. The vendors support and maintain each application, so every time there is an upgrade we don't have to incur the cost of ownership that such an environment would represent. We did it in about 18 months—the entire thing. That included distribution, all financial systems, reporting systems, our ERP system—we replaced the entire thing. The only thing we kept was the POS application, but some of the brains we changed at the POS level as well. We finished this last October. We also have a third-party provider that does distribution for us. The great thing is that being a small company, we can flex up or down depending on needs in terms of capacity and variable cost.

How do we build the vision? We started by saying, 'How are we going to win?' We inherited a casual wear line grounded on the four pillars. The product is primarily rooted in denim and weekend wear. We always used a very traditional distribution network comprised of specialty, outlet, wholesale, and e-commerce. We always used traditional marketing—I'll show you some. And the business was always focused on domestic distribution. Where we are going: we want to become a billion-dollar company in five years. We want to align the aesthetic of the vision and the brand voice—which is a very hard thing to do in our business—but we think we're on the right track. We want to create a premium lifestyle brand that offers a full range of products going well beyond just denim and casual wear, without abandoning those core principles and the value the brand always stood for. We want to have larger showrooms that appropriately display the expanded product line, because part of the opportunity is to go after many other occasions. We want marketing that engages the customer at all touch points of their life. This is challenging, but we have done some work with a partner where we studied the customer life journey and understood that a 35-year-old mom, for example—what does she do in the morning? Just checking her iPhone to see what the weather is going to be like before she takes the kids to school. We want to be there if that is a key touch point. That's an example of becoming more engaged with her and him throughout their lifestyle. Also, expanded footprint to capture international demand.

This is our team. Everything you see in yellow is either new people or new roles that existing people in the team had. We took a very challenging line to eliminate layers. We have a pretty delayered organization now—we took out about two layers since we took over. We have a very young team. In the corporate group, which has about 450 people, the average age is about 35. People are very excited about what we're doing and thinking about making a big impact in the world. Two people I'm going to single out: Kingying Lee, our Chief Creative Officer. She came from Madewell, where she spent about eight years. She started that brand with Mickey Drexler and did a phenomenal job. Before that, she was part of the A|X Armani Exchange team and she started Hollister with Michael Jeffries, and then Ruehl (you may remember that brand). So she has that entrepreneurial, creative spirit to really build what we think we need to do here—which is build a new brand in a way. The next person is Matthew Fior, our Chief Merchandising Officer. He was heading the wholesale business when I came in. I think Matthew is a tremendous talent. He has tremendous experience in denim but also outside the denim world, with Levi's. I think he started at Gap at some point. Matthew and Kingying work together in such a great way, and I think that is such a key thing anytime you need to create a new strategy or execute on a new strategy—just make sure the team really works together in an incredible way.

How will we do it? We start with the product. This box represents that core business—the casual wear, the denim. On top, we see an opportunity to expand into other wearing occasions—to work, tailor clothing, whatever it is that can be done for this brand. Increase the breadth and depth to dominate existing categories. We felt we have a big opportunity to stand for what we believe. If you're going to have sweaters, not just a couple, but an assortment where the customer can wake up in the morning and say, 'I'm looking for a sweater, I'm going to Lucky Brand.' Introducing new categories—we see a big opportunity because of the range and elasticity of the brand to go into other categories. Last but not least, we felt we were almost too focused on certain prints and certain types of product. We didn't have a versatile line. So we are looking to develop product that has broad appeal and versatility. Out of ten women, we want eight of them to like what we're doing, as opposed to two. This is an exercise we did. We put that family into the customer journey. In this case, the woman is a 36-year-old restaurateur and entertainment host, and the man is a 40-year-old business analyst. They have two kids, a dog, and live in that house. We then gave our team—especially the design and merchandising team—the opportunity to think about what this meant. What are we shooting for? What are we trying to create? We put these customers into different occasions we were pursuing. In everyday casual for her, what would she wear? Not all this product is Lucky product, but the aesthetic and respecting the DNA of the brand was key. We did the same for him—everyday casual, everyday work attire for her and for him, date night, special events. We can get away to concerts—I said we really believe in music and the pillars. What would they wear for that? Even going into vacations, resort, or athleisure. We have a line called Lucky Lotus for women, thinking about working out or being more comfortable. And then thinking about the home. We have a wealth of prints and different fabrics we use for apparel. There is significant alignment with what we do in the home—the taste levels are very consistent. If someday we were into furniture, what would that look like? Leather has always been a key material for us. Or if we had a line of lighting. This is working. Our e-commerce business last year was up 40%, primarily driven by the expansion of our assortment. We closed with about $58.5 million.

We are also looking at working with our people in the field in our own stores to help the customer see the brand not just for what it is in the four walls, but what is behind us—the comprehensiveness of the brand. We are trying to drive that through our own team on the selling floor, and it's working. When we look at what we call 'e-stockroom,' these are sales being booked by our team on the selling floor—exclusives that they cannot see in the store. That business was nonexistent when we took over. We did about $5.5 million last year, so between the two years we picked up $2.5 and $2.7 million. This is also carrying to our retail partners—they are buying from a larger line. Two examples for proprietary reasons we cannot name them, but these retail partners saw their businesses go from $9 million to $18 million and from $10.7 to $19.2 million in the same two-year period because they are selling a lot more of the enhanced expanded line. We are excited about that. We are doing the same with licensing. We just signed a few new licenses—one is doing outerwear. We have a big business with Vince Camuto, who does our shoes—a very successful business. We have a lot of others in the works, so the idea is to continue to enhance and enrich the world of product we are offering our customers. Then we looked at our stores and said we need to create a new environment to represent the brand in a more premium way. We had an opportunity to open a new store—our typical store is about 2,400 square feet. This one is about 5,700 square feet. It's in a small center near Manhattan Beach. This store has almost 60 feet of frontage, very different from anything we have done in the past. We took the opportunity to create a completely new environment and redesign every aspect of the store, yet be completely true to the DNA of the brand. We put that door which is a vintage kind of garage door that opens—very cool. We gave denim a central stage and put in skylights for natural light. We divided the store into different rooms to celebrate each occasion. This is the one for athleisure, for example, for men's. Then we created an area in the back that celebrates the whole accessories area—what you see there with steel and glass is like a life-size jewelry box. Inside we have shoes and some home products. It was just a test, but it's being embraced by the customer. This is the shoe area. We celebrated the pillars with an art installation—a vintage Triumph motorcycle hanging from the ceiling. People now have areas to sit, even have a drink—if you can believe that, we don't charge—that's a scotch bar. The idea is that because our customer is more of a family than an individual, they often come together. We want to give them the opportunity to relax and enhance the shopping experience. What we are seeing is that conversion has shot up significantly in this location. The time they spend in the store is significantly higher. We brought some technology—a company called ... we did this with Leon Fang, who bought a company called Catalog. The idea is that we tag every item with an RFID tag, so the system reads what that tag is and you can see the image on a screen in the middle of the selling area. The system then shows alternative products you might be interested in. If you are interested in that shirt, you can see the jeans, the belt, the piece of jewelry. We also have a similar installation in each fitting room. If the sales associate is helping someone in the fitting room, there is a screen like that—smaller—and the customer can reserve a particular piece in a specific size. The sales associate gets a notice on their iPad and can bring the product. We did this in another store in Summerlin, Nevada, and we are seeing similar behavior. We are doing something similar with outlet stores.

Regarding marketing, on the left is what we inherited. On the right, we changed. We had the mom and girl coming to the store, and they saw our marketing campaign. We decided to paint a completely different picture and cater to the family. We also changed the way we're spending money—spending a lot more on digital and reducing traditional advertising. We were advertising in LA Magazine—850 pages. I knew we were there, but it took me about 20 minutes to find us. That gives you an idea of how significant it was for us to have one page. So we are trying to go more grassroots and take advantage of the big opportunities with the new world.

I'm going to spend two minutes on this. If you haven't read this book or heard this guy talk, Simon Sinek is his name. He talks about starting with why. This guy made such a big impact on me that I thought I would share it with you. There is a TED talk—you can see the video. He talks about typical companies—most talk about what they do, and some also talk about how they do it, but very rarely do companies talk about why they do what they do. He insists that people really buy why you do what you do, as opposed to what you do. Picture a typical car company: they say, 'We have the best cars—BMW, the ultimate driving machine. Our cars are very fast, super cool, they look extremely nice.' That kind of advertising is uninspiring. He talks about Apple as one of those companies that start exactly the opposite way—they start with why. Their why is: 'We challenge the status quo. The way we do that is by making products that are beautifully designed, easy to use, and the best you can find.' Because they tell you the why, we are all much more open to understand why we might buy a computer, iPod, or iPad from Apple. We don't resist because we share the why. For Lucky Brand, we spent quite a bit of time internally to think hard about this concept. We engaged the entire team—including our field personnel—to contribute their thoughts. This is what we came up with: 'Look good, feel good, do good—inspiring everyone to lead a lucky life.' That's our why. Of course we are in the business of making people look good, so having a beautiful product is part of that. But we believe that health is wealth, so we are trying to bring a lot of energy inside our company for people to be careful about how they eat, how they live, how they exercise. Last but not least, we want to make a difference in this world. There is a Lucky Foundation that we are re-energizing and funding to really make this world a better place. We talk about the fact that we are all in control of making our own lucky life—that this is not just something that happens to us, but something we are in control of. Let me show you a little video, and with that I'm ending. Your martini is right in front of you all. Can you play that video?

The video is playing. I'll let it speak for itself. Thank you. Thank you so much. Thank you.