Lululemon Is Acting a Lot Like Abercrombie & Fitch

Let's imagine the scene that took place in two different C-suites this past week.

First, in Vancouver, British Columbia -- headquarters of lululemon athletica (NASDAQ: LULU  ) -- we see executives are moaning, heads in hands, after Lululemon founder Chip Wilson's appearance on Bloomberg TV, where he flat out said that "some women's bodies just don't actually work [for the yoga pants]."

Then he made it worse, going on to describe in more detail the faulty female mechanics (women's thighs rubbing together) that caused pilling on the Astro yoga pant, Lululemon's most recent quality control dilemma. The debacle has prompted a petition by Change.org calling for Wilson's public apology and an admission that the problem is with the pants and not the ladies.

Meanwhile, imagine being a fly on the wall in the New Albany, Ohio, C-Suite of Abercrombie & Fitch (NYSE: ANF  ) . The mood there, we imagine, is one of relief -- maybe even outright elation.

There, the executives are smirking with relief that founder/CEO Michael Jeffries isn't in the crossfire... this time.They've done their fair share of crisis management, given Jeffries' past comments about how Abercrombie's fashions are only for the "cool kids" and its conscious decision to spurn plus-size customers. And, like Lululemon, their CEO has also made the company the target of petitions and boycotts.

Adept at foot-in-mouth yoga pose
The occasional gaffe can be expected from a CEO. It's repeat performances that are a problem.

This isn't the first time that Lululemon's Chip Wilson has generated controversy and embarrassed the company. In 2005, he advocated child labor in Asia as a means to bootstrap families out of poverty, adding that 12- to 13-year-olds in Canada should work in factories rather than take handouts from the government.

Then there is Wilson's take on breast cancer and divorce. This is directly from a 2009 blog post on how Lululemon grew.

Breast cancer also came into prominence in the 1990's.  I suggest this was due to the number of cigarette-smoking Power Women who were on the pill (initial concentrations of hormones in the pill were very high) and taking on the stress previously left to men in the working world.

And:

In the early 1970's, "the pill" came into being... Women's lives changed immediately. Men's lives didn't change however and they continued to search for a stay-at-home wife like their mothers. Men did not know how to relate to the new female. Thus came the era of divorces.

Who knew a corporate big-wig -- and one who founded a company that primarily caters to women -- could be more offensive than Jeffries?

A culture of corporate missteps
Just in August Lululemon, not Wilson, responded on its Facebook page to another disclosure that its clothes are only available in sizes 2-12 with this:

Our product and design strategy is built around creating products for our target guest in our size range of 2-12. While we know that doesn't work for everyone and recognize fitness and health come in all shapes and sizes, we've built our business, brand and relationship with our guests on this formula...

And this spring, Lululemon had to recall $17 million worth of its high-margin, too-sheer Luon yoga pants. The company said in its second-quarter earnings report that the recall probably cost Lululemon an additional $45 million in lost sales, although that was less than expected.

In June, CEO Christine Day announced that she would be leaving once a suitable replacement was found. This latest fiasco can't make that task any easier.

Meanwhile, over at Abercrombie...
Abercrombie's Jeffries seems to step in it on a regular basis. A year ago, an age discrimination suit filed by Jeffries' 50-something pilot brought to light a bizarre 47-page manual for Jeffries' private Gulfstream staff mandating boxer shorts, flip-flops, and Abercrombie cologne be worn and that the words "No problem" be used in answer to all requests.

Jeffries hasn't been in the limelight for several months, presumably lying low since a 2006 Salon interview came back this spring to bite him in his denim-clad derriere. From that interview, in answer to the importance of sex appeal in the company's strategy:

It's almost everything. That's why we hire good-looking people in our stores. Because good-looking people attract other good-looking people, and we want to market to cool, good-looking people. We don't market to anyone other than that. In every school there are the cool and popular kids, and then there are the not-so-cool kids. Candidly, we go after the cool kids. We go after the attractive all-American kid with a great attitude and a lot of friends. A lot of people don't belong [in our clothes], and they can't belong. Are we exclusionary? Absolutely.

Whether the company lost customers after that brouhaha is hard to determine: Teen retail has been challenged industrywide.

An investor could overlook a rogue CEO or founder if his her her company were performing well. But that's not the case at either retailer.

Abercrombie recently checked in with second-quarter results that were among the worst in teen retail. It reported same-store sales down at Hollister, namesake Abercrombie, and abercrombie kids. It also guided lower than analysts expected for the third quarter.

In the meantime, shareholders have been understandably upset with Jeffries' compensation of $8.5 million, the highest CEO pay per worker annual salary (worth 1,640 employees). They overwhelmingly voted against a company-proposed compensation package in June.

At Lululemon, investors already voiced their apprehension at the coming change in management. When CEO Day gave her notice, the stock fell nearly 20%. The stock is barely up 0.89% on the year after five years of fabulous stock appreciation under Day's tenure.

Then there are the two high-profile fashion faux pas, raising questions about product quality. Lululemon built its reputation on high-quality merchandise, which translated into healthy gross margins. There's growing competition for disappointed Lululemon shoppers, with companies like Under Armour and Nike getting into studio workout gear.

Stop insulting your customers
There's a lot that these companies have going for them, including the potential for future growth. But when building a business that's based on certain brand attributes, every misstep -- even if it comes from the C-suite -- is bad for the bottom line. Insulting potential customers is no way to run a business.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 12, 2013, at 11:49 AM, plange01 wrote:

    lulu's problems sound more like short sellers trying to manipulate its stock price than anything else.customers who keep on buying more don't know or care about any of this nonsense....a buy on lulu with a $90 price target..

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