Can lululemon athletica Get Back in Shape Against Gap and Under Armour?

lululemon athletica (NASDAQ: LULU  ) will release its quarterly report on Thursday, and shareholders have had to deal with the unusual situation of seeing their stock go nowhere over the past few months. Although the company has recovered somewhat from its summer lows, lululemon faces inspired competition from Under Armour (NYSE: UA  ) and Gap (NYSE: GPS  ) , both of which are trying to take full advantage of lululemon's miscues to grab up more market share in the lucrative yoga-apparel space.

For years, lululemon athletica had full brand loyalty of yoga practitioners, with high-quality products designed specifically for customers who were willing to pay premium prices. But amid quality-control controversy earlier this year, Gap and Under Armour swooped in to capture dissatisfied lululemon customers. So far, lululemon has struggled to find a solid answer to the challenge its competitors have set for it. Let's take an early look at what's been happening with lululemon athletica over the past quarter, and what we're likely to see in its report.

Stats on lululemon athletica

 

 

Analyst EPS Estimate

$0.41

Change From Year-Ago EPS

5.1%

Revenue Estimate

$376.15 million

Change From Year-Ago Revenue

18.8%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can lululemon athletica earnings recover to full strength?
In recent months, analysts have stayed cautious on lululemon athletica earnings, cutting October-quarter and full 2014 fiscal-year estimates by $0.04 per share each. The stock has gone nowhere, falling 1% since early September.

The woes at lululemon continued coming into the quarter, as the company's July quarter report included some troubling results that overshadowed considerable strength from the retailer. Same-store sales rose 8%, helping lift overall revenue 22%. But net income actually dropped, with margins collapsing in the aftermath of the company's recall of Luon yoga pants. Guidance from lululemon also disappointed investors, with both sales and net income projections well below what investors wanted to see.

But even more troubling is that quality complaints at lululemon have continued, even after the apparent resolution of the Luon issue. In addition to prior complaints about sheerness, new criticism over pilling and fraying has some wondering if quality control is a bigger issue at the retailer. Founder Chip Wilson didn't solve the problem when he tried to put some of the blame on lululemon's customers rather than taking responsibility for the company's product quality. Regardless, customers are clearly no longer unanimous in their loyalty to lululemon, and that's a big hit to its once-flawless reputation.

In response, competitors have redoubled their efforts to take lululemon down. Gap has seen huge gains this year, and its Athleta line of athletic apparel has been a big part of its comeback. Gap represents a big threat to lululemon's margins, as Athleta's Chaturanga yoga pants are priced at almost a third less than Astro yoga pants at lululemon. Athleta also offers plus-sized clothing and has adopted lululemon's strategy of working with local yoga instructors to highlight its products. Meanwhile, Under Armour has worked hard to try to capture more women customers, rolling out ads tailored for women, and changing its store layouts to appeal more to female shoppers.

In the lululemon earnings report, watch to see whether the retailer can answer some of its public-relations problems, and get back to giving customers the high-quality merchandise they were once famous for. Without a return to its original principles, lululemon could continue to drift as its competitors pass it by.

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