Why lululemon athletica Is Getting Hammered Today

An analyst downgrade puts the brakes on any momentum that Lululemon may have built up over the last few months.

Feb 28, 2014 at 3:30PM

Here's a telling detail: Since Jan. 13, 2012, there has only been about one month in which buying lululemon athletica (NASDAQ:LULU) would have you in the black today. Seemingly constant quality and image issues have plagued the company, driving the stock further into the dirt. Today, Lululemon got a fresh blow on the head from Credit Suisse analyst Christian Buss.

Buss said that, even though product issues were beginning to clear, communications missteps -- like, for instance, saying that your product isn't for overweight people -- have damaged the brand. That, Buss says, is going to have a negative impact on store sales, driving the company down further. Ouch. Looks like [insert your favorite recycled downward dog joke here].

Lululemon's missteps give competitors an opening
Imagine you're playing golf with Tiger Woods. Let's pretend he's having bad day, so you might have a shot, vague but existent, of beating him. If you're Lululemon, you step up to the 18th tee, turn around, and swing as hard as you can with your putter.

Bigger athletic brands like Nike (NYSE:NKE) and Under Armour (NYSE:UA) were slow to get on the studio/yoga bandwagon, giving Lululemon free rein to take over the lucrative segment. At the end of 2012, Lululemon had increased annual comparable-store sales by 16% and revenue by 37%. The yoga studio was awash in black Luon fabric.

Then, in early 2013, the fabric unraveled and Lululemon's lax production oversight brought the whole thing crashing down. Over the rest of the year, the business lost key management members, had new product issues pop up, saw its founder go off the rails, and dropped sales like a farmer carrying a greased pig. Lululemon's most recent fourth-quarter guidance is for flat comparable-store sales and a fall in revenue. 

How the competition is making Lululemon hurt
Yoga hasn't stopped, though, and more and more women are turning away from Lululemon to Nike and Under Armour, both of which have increased the focus on their women's workout lines. Nike is building its own community for women, focusing on runners. These clubs have generated extra sales for the company, and have no doubt pulled in some unhappy Lululemon customers.

Under Armour has made a more direct approach with its women's studio line, underpinned by strong sales of its Armour Bra. In addition, Under Armour is finding that its products are increasingly becoming popular as fashion items, another role that Lululemon traditionally played.

Today's report from Buss shouldn't come as a surprise to anyone who's been watching Lululemon over the last year. With ample opportunity to make a turnaround, Lululemon has seemed content to just plow ahead with self-destructive behavior. The company's new CEO, Laurent Potdevin, has his work cut out for him, and it seems unlikely to be a job that's completed in 2014. This brand needs a lot of work if it's going to look anything like its former self.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica. It recommends and owns shares of Nike and Under Armour. 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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