Is This the End of Lululemon as We Know It?

Occasionally, The Economist will post high-level positions in the back of its pages for CEOs, finance ministers, or the like -- anyone interested in running a massive yogawear company might consider picking up the next issue. Yesterday, after the markets closed, lululemon athletica (NASDAQ: LULU  ) announced that Christine Day would be stepping down from the CEO role after a five-and-a-half-year run. Today, the stock dropped 16% in midday trading.

The journey, according to Day
The stock's fall trimmed back a huge amount of the gain that Lululemon has seen over the last 12 months, and the news puts up a huge warning sign for the future of the company. Day spent the first part of her career at Starbucks, moving to Lululemon in 2008. Since then, the company has grown from a $275 million in annual revenue  minnow into a $1.4 billion leviathan.

Along with Day's resignation, Lululemon also announced analyst-beating estimates yesterday, in a scene that's become familiar to anyone watching the company's growth. The fact that the stock still fell highlights the value that Day was seen as adding to the company. In her statement, Day said that the company was ready for new leadership as "[plans] have been laid for the next five years and a vision set for the next 10." That confidence in the ability of the Lululemon machine to continue beyond her reign may be misplaced.

The cost of leadership
While Day may have the hearts of investors, she has recently been a lightning rod for complaints from Lululemon fans. Since the sheer-pants scandal earlier in the year, customers have called on Day to resign, citing her failure to live up to the brand ideals of Lululemon while expanding the company at all costs.

That allegation certainly has some backing. The product issues of earlier in the year did have a meaningful impact on sales. The company had originally forecast a comparable-sales increase of 11%  but only managed an increase of 7% . The product issues may well have stemmed from the company's -- and Day's -- single-minded focus on expansion. When Day joined the company, Lululemon operated 81 stores -- today it runs 218.

What comes next
With Day's resignation, Lululemon is in an interesting position. The company could probably find an internal candidate fairly easily, but since Day's appointment in 2008, the competitive landscape has changed dramatically. Now, Lululemon is facing competition from Gap's (NYSE: GPS  ) Athleta brand, as well as from Under Armour (NYSE: UA  ) and other traditional sporting goods companies.

Gap and Under Armour both make similar products at slightly lower price points, and both have made it clear that yogawear is going to make an impact on their future bottom line. Now Lululemon is in a position where it can conceivably pull an important manager from one of those competitors.

At Gap, Art Peck is managing the portfolio of brands that Athleta falls into. The role is new to him, but he's been with the company since 2005. His experience as president at Gap North America would be an extremely valuable tool for Lululemon, if it chose to pursue him.

At Under Armour, both Charlie Maurath and Henry Stafford would be welcome additions to Lululemon's team. Murath is the president of Under Armour's international business, while Stafford is senior vice president of apparel. Both executives have experience that would help Lululemon as it pushes for more international exposure.

In general, I think Lululemon still has a lot of room left to run. While Day is impressive and important to the company, she isn't irreplaceable. I'd love to see Lululemon take this opportunity to add a rival to its team, which would give it a strong competitive advantage. If I were on the fence about Lululemon, I'd see this downturn as a real opportunity.

Even with the loss of Day, 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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  • Report this Comment On June 11, 2013, at 7:39 PM, LQM2 wrote:

    Buying LULU here seems like a no-brainer. LULU needs different skills to move to the next level so some fresh blood would be good. Day is burnt out..it happens.

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