What's in Store for Lululemon?

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Back in March, things fell apart for lululemon athletica (NASDAQ: LULU  ) . The company had to pull product off the shelf, after it determined that the fabric in many of its pants was too sheer. That news hammered the stock, sending it down 8% in the week after the announcement. Lululemon jumped to make good on the bad news, and now it seems to have turned itself around. With first-quarter earnings coming out next week, what should investors be on the lookout for?

Product issues addressed
Since the 8% drop, Lululemon has rebounded like a Super Ball, up 30%. The company took relatively quick action, pulling the affected products, addressing customer issues, and removing the company's chief product officer in early April. The quick turnaround from shamefaced admission to triumphant return meant that competitors didn't have a chance to capitalize on the bad news.

Under Armour (NYSE: UA  ) and Gap (NYSE: GPS  ) both had a chance to make something of Lululemon's bad news, but neither acted quickly enough. As a result, Lululemon is likely to see less damage to its top and bottom lines in next week's earnings announcement. The company initially announced an impact on comparable sales of between 3% and 6%. I would be surprised if the damage was that bad, and the original comparable sales increase of 11% no longer seems out of reach.

Competition on the horizon
With its biggest 2013 issue behind it, Lululemon and investors can now look forward to the rest of the year. That means readdressing the threat that competitors pose. Gap has a specific yogawear brand, Athleta, and also carries similar clothing at its Gap and Old Navy stores. Under Armour also has a huge yogawear line -- its Studio collection -- which has driven growth for the women's business.

Both Gap and Under Armour are making moves into new international markets, while Lululemon has been dragging behind. On the company's last call, it said that it was going to focus on the U.K. and Hong Kong in 2013. So far, the business has been slow to expand internationally, as Lululemon uses a very conservative expansion model.

In addition to its two focal areas, Lululemon is going to start "establishing local community connections and introducing [its] beautiful product to guests in a variety of markets in Europe and Asia." The time that those connections take to build means that Under Armour and Gap have a chance to move more quickly.

Gap, especially, has the brand-name strength to make quick moves internationally. Its Old Navy brand is diving headfirst into Japan, opening nine stores in the country last quarter. That gives it a jump on yoga distribution, and it puts Lululemon on the back foot.

The bottom line
While I'm expecting good things from Lululemon next week -- and for the rest of the year -- I'll be keeping an extra-close watch on the company's expansion plan. Lululemon has the upper hand in North America, by virtue of being the first mover; if it wants to replicate its success overseas, it needs to move faster. Next week, I'll be looking for speed.

Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can Lululemon fight off larger retailers and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.


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Related Tickers

9/27/2016 4:00 PM
LULU $64.52 Up +0.49 +0.77%
Lululemon Athletic… CAPS Rating: ***
GPS $22.29 Up +0.06 +0.27%
Gap CAPS Rating: **
UA $39.19 Up +0.59 +1.53%
Under Armour (A Sh… CAPS Rating: ****