Why Lululemon Is Still in Trouble

I'm trying to figure out the ideal apparel-business model and I was hoping to get some feedback. In version one, I design a great clothing line, build an excellent fan base, sell at a high margin, and give back to the community. In version two, I do all the same stuff but then I occasionally tell my customers they might be too fat to wear my clothing line. Also, sometimes the clothing is see-through or poorly made. Chip Wilson, the founder of lululemon athletica (NASDAQ: LULU  ) , apparently likes version two.

Lululemon's brand mismanager
Earlier this month, Wilson said that the reason some of Lululemon's clothing was pilling -- getting those little rice-shaped balls of fabric building up -- was that customers' thighs rubbed together. In other words, some folks are just too fat to wear these clothes. As it turns out, that was met with some frustration by Lululemon's loyal customer base.

These are the people who are shelling out close to a hundred bucks to buy a pair of yoga pants and who are keeping the company's gross margin above 50%. Wilson soon realized his error -- or someone told him, more likely -- and he went to YouTube to apologize.

As The Washington Post points out, that apology rang a little hollow, with Wilson saying that he felt "sad for the repercussions of [his] actions" -- emphasis added. Wilson has never been a soft speaker, and in 2012, his role at the company was severely curtailed in light of his outspoken nature.

Problems beyond Wilson
While Chip Wilson's quick mouth has gotten the business in trouble once again, Lululemon's bigger problem is its ongoing quality and management issues. This year the company has already lost sales due to a problem with sheer material, and now it's facing new issues from pilling. If this had been happening even three years ago, the results wouldn't have been so damaging. Back then, no one else was really competing in the yoga space. Now, the market is lousy with yogawear.

Lululemon's biggest threats are coming from Nike (NYSE: NKE  ) and Under Armour (NYSE: UA  ) . Nike is the master of all things sporty, pulling in more than twice as much income as Lululemon manages in revenue, each quarter. Nike has recently made women's clothing a priority, and it's pushed its own community platform to help make that business dream a reality.

Under Armour has long been the go-to for high-end sports bras, and now the business is expanding its women's offerings to capris and studio products -- the general term for yoga and exercise clothing. As Under Armour puts more women's clothing in its stores, Lululemon is going to have a harder time growing simply through momentum.

Reason for concern
Lululemon has had a bad year, but it's had a bad year because it screwed up over and over. Everything that the company has fumbled this year was within its control. The product-quality issues in the beginning of the year were due to a lack of oversight, the new pilling problem is simply bad testing, and Chip Wilson's continued stumbling needs to be met with PR coaching or a distancing of the brand from its founder.

Last year, I liked Lululemon's success, its strong customer base, and its philosophy in management. This year, the company has shown that all of those strengths fall apart under pressure. I'm hopeful, but not overly optimistic, that 2014 might see the business finally grow up.

Better options for investors
While Lululemon's ship gets rocked by waves of its own making, other companies are making their own beautiful lakes. These businesses are seeing the retail landscape for what it is --  a shifting sand dune -- and are refusing to let it push them around. The Motley Fool has a new report on some of the best brands in this new retail world, and we're giving free copies to readers. To learn about two retailers with especially good prospects, check out "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.


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