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Can Lululemon Spend its Way Out of Trouble?

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Beleaguered by slumping sales and a series of costly public relations gaffes, Lululemon has crafted a new turnaround strategy: it will spend its way out of trouble.

More specifically, the yoga clothier intends to revamp its embattled brand by pouring money into new product development, increasing the speed with which it offers new styles to consumers growing bored with its stale offerings.

Laurent Potdevin, CEO of Lululemon, said, “Going forward, we are refocusing the organization on being design-led, about getting back to our roots and inventing the future, and we are doing that by fostering and promoting the healthy tension between technical innovation, style, function, and beauty. There will be no compromising, and it will bring out the best in us.”

Tara Poseley, Lululemon’s chief product officer, discussed the new plan to invest in product development as a return to the retailer’s roots. She said, “Impeccable quality is deeply rooted in our DNA. We are laser-focused on ensuring we have a world-class quality supply chain and organisation to support our current business and product platform for continued global growth.” As we continue to build on the great work that has been done, we are seeing a constantly increasing level of our product meeting our very high quality standards.”

Potdevin added, “There will be continued focus and investment in this area to ensure we’re building a product development platform that will allow us to unlock our full global potential.”

Lululemon had a problem-ridden 2013, and is desperate to craft a rebound strategy that regains its once storied success. Once a rising star among athletic wear retailers, it has been plagued by financial setbacks, some of them directly related to dysfunction along its supply chain. But now the company is dedicated to a comeback, and to repairing an image that, for many, has lost its luster.

John Currie, the company’s chief financial officer, candidly commented on Lululemon’s recent travails. “2013, that’s a year that we’re quite happy to see going behind us … the quality problems that we had earlier in the year were a real wake-up call. You always hear the phrase that any PR is good PR. What we learned is that’s not always the case. I just wanted you to hear that we’re taking it seriously. Like, we get it.”

The retailer infamously stumbled last spring, forced to recall its best-selling black “luon” yoga pant style after it was discovered that the stretch fabric used to make it was too sheer. The luon pant shortage certainly left its mark; inventory at the end of that quarter equaled $163 million, in comparison to the previous year’s $125.4 million. Chief Product Officer Sheree Waterson was terminated because of the snafu. Then-CEO Christine Day unceremoniously resigned.

In response to a manufacturing problem, Lululemon overcommitted itself to mending its broken supply chain and increasing the heavily criticized quality of its offerings. However, progress on this front came at the expense of innovation as Lululemon’s designers neglected to introduce new products, lending itself to stale store inventory.

Janet Kloppenburg, founder of retail consultancy JJK Research, said, “They spent a lot of time trying to get back in stock on Luon. As a result, they ordered the fashion product later than they should have and are suffering from late deliveries.”

To only worsen matters, Lululemon’s manufacturing missteps were closely followed by a series of public relations debacles. As the retailer’s iconic yoga pants continued to attract criticism for inferior quality, specifically with regard to pilling, company founder “Chip” Wilson suggested the construction of the pants was acceptable, and that it was customers’ bodies that were to blame. He infamously remarked, “Quite frankly some women’s bodies just actually don’t work for it. It’s really about the rubbing through the thighs, how much pressure is there.” Unsurprisingly, a maelstrom of negative press ensued. As a result, Wilson relinquished his position as non-executive chairman of the board.

However, there are happier signs that Lululemon still has powerful potential to regain lost footing. According to Faye Landes, a retail analyst at Cowen and Co., the company still has a strong customer base. “Nearly 3 million U.S. adults name LULU as their first choice for athletic apparel brand – despite the company’s limited distribution, high price points, and extremely entrenched competition, including NIKE and UA [Under Armour]. This figure implies average sales of approximately $390 a year for each such LULU lover (we recognize that sales per customer vary widely – our data shows that 32% of LULU shoppers buy 3+ LULU items a year, and that 8% of LULU shoppers buy 6 or more items a year – and that LULU purchases are not limited to LULU lovers).”

A thorough transformation of Lululemon’s business model will not happen overnight; speaking to the possibility that adding more seasonal products is consistent with the current consumer appetite for variety, CFO John Currie said that the retailer won’t “have the depth to capture the demand in these categories in the first half of 2014.” He continued, “While we are actively pursuing our opportunities to chase and fast turn product which will help mitigate some of this gap, our ability to buy deeper to rebalance our assortment to this shift in guest demand is weighted towards the back half of the year.”

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