How Lulu Dropped the Ball This Quarter

This was a rough quarter for Lululemon (NASDAQ: LULU  ) , to say the least. The yoga wear giant had to weather a maelstrom of negative PR, not just from a problematic pants recall, but also from controversial comments made by founder Chip Wilson regarding those pants. Now that both Wilson and CEO Christine Day have announced plans to leave Lulu (and on the same press release no less), the company is hoping to change its publicity's spin back to positive.

However, the market isn't convinced just yet. Even though many of the company's metrics fell in line with expected guidance, the stock dropped from $68.35 per share to around $59. What does that mean for the future of Lulu?

The numbers
When it came to sales, the quarter started out softly for Lulu. Chief financial officer John Currie explained that delivery issues kept the company's summer items on the floor for longer than usual- until the end of August, when the brand usually stocks its autumn items. By October, Currie says Lulu managed to shake that softness, though the late deliveries of fall inventory led to an uneven product flow.

On the income statement , Lulu's revenue rose a solid 20%, to $379.9 million. Comparable store sales also rose 5%, and Currie explained that if E-Commerce stats had been included, that number would have gone up to 8%. Those positive stats still weren't enough to keep Lulu's stock from plummeting on the day of the release, so what caused it?

The controversy
An obvious answer here is Lulu's less-than spotless public image as of late. During his comments, Currie addressed the controversy, saying it would be "naïve" to think that the recent PR fiasco- a combination of faulty product, CEO gaffes, and departing execs- did not have any effect on Lulu's overall quarterly performance.

That being said, it wasn't just a CEO putting his foot in his mouth that sent Lulu dropping. The company also reported a change in guidance for the next year. Instead of expecting annual sales for 2014 between $565 and $570 million- as previously reported- Lululemon revised that number to between $535 and $540 million, with comparable store sales expected to be flat as well. Besides the aftershocks of controversy, Currie attributed the lowered expectations to supply issues, traffic trends, and a weaker Canadian dollar. That's not what the market wanted to hear from Lulu, especially not now.

A change in the wind
Lululemon has the opportunity to start anew with the arrival of new CEO Laurent Potdevin and new chairman Michael Casey in 2014, and it will be interesting to see how Wall Street responds to this changing of the guard. The yoga wear label will still have its share of difficult transitions to face next year, but having a chairman un-beleaguered by controversy could be a breath of fresh air for the company, at least from a PR perspective. Whether that translates to financial success, of course, will be revealed in due time.

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