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Lululemon Commits To a Better 2014; Analysts Say Problems Remain

Lululemon is anxious to put 2013 behind it. 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  financial ramifications of Lululemon’s floundering has been considerable. The yoga-retailer now expects to register earnings of 71 cents to 73 cents per share in the fourth quarter, much lower than the previously predicted 78 cents to 80 cents. Store revenue could be as low as $513 million, a meager sum compared to company’s projection of $540 million. This underperformance is a sharp departure from its once impressive success: from 2008 to February 2013, Lululemon’s revenue soared to $1.4 billion from $270 million. Without disclosing specific statistics, Currie conceded that sales in January experienced a “meaningful drop.”

Over the last seven months, Lululemon’s share prices plummeted nearly 40 percent. And the retailer recently announced it expects sales at established stores, acknowledged industry-wide as an important metric, will almost certainly drop for the current fiscal quarter. According to Faye Landes, a retail analyst at Cowen and Co., the worrying falloff in comparable store sales has been in the “high teens.”

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Landes wrote, “”Weather is a likely issue, but we still view these results as abysmal. Lulu pointed to some mix issues, notably insufficient seasonal merchandise, but we’re not sure how or when this sort of thing will ever be ironed out.”

Part of Lululemon’s challenge, according to Landes, is that the principal sources of its sluggishness remain obscure. “We still don’t have much clarity on what exactly has led to such a sharp deceleration in sales, and therefore don’t know what the fixes are,” she wrote.

And important questions remain about the profile of Lululemon’s typical customer. Landes wrote, “We also don’t know whether Lulu’s core customer, who in many cases has many pieces of Lulu, has switched to more of a replacement cycle, which, if true, is not positive for the company’s growth rate.”

Of course, Lululemon is one among many retailers to falter recently, swimming against the current of general economic malaise and suffering from a financially pinched consumer public. However, what makes Lululemon’s troubles so unique is that the worst of them seem to stem directly from problems embedded within their supply chain. Last Spring, the company was 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 will relinquish 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 Landes, the retailer 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).”

And as battered as Lululemon’s reputation is these days, the brand still resonates well with those shoppers who identify strongly with a health and wellness fueled lifestyle. Landes observed, “Our data shows that the women, and men, whose athletic apparel brand of choice is LULU are also far more likely to be foodies and fashionistas, and they are much likely to lead a healthy lifestyle than others, including NIKE and UA fans. We do not think this limits the brand’s appeal or ultimate size, and believe that the strong association of the brand in consumers’ minds with a healthy lifestyle, as the data suggests, implies further growth ahead as healthy lifestyle trends continue to gain momentum.”

Still, it’s anybody’s guess what the future will bring for Lululemon, the latest example of how quickly the fortunes of a major brand can change for both the better, and then for the worse. Landes concluded her analysis highlighting the uncertainty of the company’s odds at renewal. “The company’s new CEO, Laurent Potdevin, will be officially joining next week. He will certainly have his hands full. We prefer to stay on the sidelines till the dust settles and he settles in.”