3 Things Lululemon Needs to Do in 2014

Product recalls and PR scandals dominated Lululemon last year. How can Lululemon ensure that doesn't happen again?

Jan 20, 2014 at 10:00AM

Shares of athletic apparel company Lululemon (NASDAQ:LULU) were down more than 16% recently after the company announced a dim fourth-quarter outlook. The company presented at an industry conference the following day and embraced the theme of "what doesn't kill us, makes us stronger." Lululemon's 2013 was filled with product recalls, public relations controversies, and a CEO replacement. Will Lululemon have a smoother road in 2014, or will it suffer under increasing competition from the likes of Gap (NYSE:GPS)

Lululemon's fourth-quarter revenue estimates were lowered to $513 million-$518 million, down from the previous forecast of $535 million-$540 million. The EPS estimate is now $0.71-$0.73. Analysts had predicted revenues of $540 million and EPS of $0.79.

What opportunities does Lululemon have to improve performance in 2014? 

1. Establish the new CEO-and keep Chip Wilson quiet 
Laurent Potdevin officially begins as Lululemon's new CEO this week. The company would benefit from putting Potdevin front and center quickly to calm investor fears stemming from last year's product recall and PR meltdown. Potdevin comes from Burton Snowboards and has experience with both athletic goods and public relations battles. 

Lululemon shares dropped nearly 14% last summer when Christine Day announced her plans to depart once a replacement was found. Potdevin was named as Day's successor in December, on the same day that controversial founder Chip Wilson stepped down from his chairman position. 

Wilson had earned a wave of bad press for the company after he blamed product quality complaints on the rubbing thighs of customers. He doubled down with an "apology" that was targeted more at his company than any potential shoppers he might have offended.  And the incident was merely the latest in a long line of Wilson's verbal blunders.

So there's a question of how well he will stay in the background. But it's vital that Wilson does sit back and stay quiet -- preferably for the long-term, but at least until Lululemon has established that quality issues won't continue. 

2. Improve quality control
The sheer yoga pants problem led to a recall of 17% of the Luon pants. Lululemon claimed that the product issues didn't stem from any change in manufacturer or ingredients, but something clearly went wrong. 

This large-scale and well-publicized quality problem has tarnished Lululemon's reputation for quality construction. And the Luon pant recall and eventual arrival of replacements also threw off Lululemon's supply chain. The company's method of stocking matching styles in limited quantities meant that tops were available when pants weren't and customers seeking full outfits were forced to cancel orders.

Admitting to how the quality issues arose and ensuring that it doesn't happen again would go a long way in restoring the company's reputation. But Lululemon needs to do more than repair relationships with existing customers. 

3. Woo new customers
Lululemon constantly touts the loyalty of its shoppers, which makes sense for an aspirational brand reliant on people willing to spend $100 on yoga pants. But comparative-store sales growth has deflated in recent years, and the fourth quarter looks to continue that trend. 

 

2010

2011

2012

2013

Q1

35%

16%

25%

7%

Q2

31%

20%

15%

8%

Q3

29%

16%

18%

5%

Q4

28%

26%

10%

N/A

Source: Company filings 

The Luon recall and Wilson controversy sped up the comps drop, but it was already happening. What fueled the slowdown? Part of the problem could stem from the loyal customers not needing to buy as often or as much. 

But there's also the weakened retail climate, which could help fuel competition from lower-priced alternatives. Lululemon previously had to worry about similarly priced brands such as Under Armour, but Gap has worked to increase its presence in the athletic apparel game. Gap expected to have 65 Athleta stores open by year's end and had opened 15 in the third quarter alone.   While Gap isn't a name that immediately springs to mind when discussing athletic apparel, the chain has a strong history in casual-wear merchandising and price points nicely between Lululemon and Wal-Mart store brands. 

Foolish final thoughts
Lululemon's reputation took a major hit in 2013 and the repair job is now in Laurent Potdevin's hands. The company needs to put the product and public relations problems firmly in the past while focusing on attracting new customers. And, please, please, keep Chip Wilson quiet. 

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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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