3 Surprising Takeaways From Lululemon Athletica Earnings Call

Lululemon athletica reported fourth-quarter and full-year results before the opening bell on Thursday. But these three things may surprise investors about the company's future.

Mar 29, 2014 at 8:00AM

Investors pushed shares of lululemon athletica (NASDAQ:LULU) slightly higher in early trading on Thursday, after the athletic-apparel maker reported fourth-quarter and full-year results that beat Wall Street's expectations. But instead of rehashing the earnings news let's look at three surprising takeaways from Lululemon's recent conference call with investors. After all, this is the first earnings announcement with the company's new chief executive, Laurent Potdevin, at the helm.

No big marketing stunts in lulu's future
On his first earnings call with analysts as the new CEO of Lululemon, Potdevin said the company wouldn't turn to large-scale ad campaigns to regain momentum in the athletic-apparel space. Instead, Lululemon will rely on the grassroots marketing tactics that earned it a cultlike following in the first place.

Deep-pocketed rivals such as Nike (NYSE:NKE) and Under Armour (NYSE:UA) spend tens of millions of dollars each year on endorsement deals with celebrity athletes. In fact, Nike is reportedly on the hook to pay $1 billion to extend its sponsorship deal with Manchester United. That's an exorbitant amount of money to pay compared to Lululemon's nearly nonexistent ad budget. Lululemon, on the other hand, relies on so-called brand ambassadors to get the job done. Here's how it works.

Screen Shot

Source: Lululemon Athletica Pinterest board.

All 254 Lululemon stores offer complimentary yoga classes to the local communities. Lululemon brand ambassadors often lead these classes and, in exchange, get 15% off the merchandise. The yoga-inspired apparel retailer currently has 900 brand ambassadors in North America, which gives Lululemon a voice in local communities, according to Potdevin. Unlike Nike and Under Armour, these brand ambassadors are largely the extent of Lululemon's marketing efforts.

In the year ahead, Lulu plans to take greater control of the public discussion about its brand in order to differentiate itself from competitors like Nike and Under Armour. On the call with investors yesterday, Potdevin said one of the ways Lulu is doing this is through significant investments in technology to better understand the customer.

Stretching overseas in a big way
Another key takeaway from Thursday's call was the overseas growth opportunity that awaits Lululemon in the Asian and European markets. The company is aggressively expanding into new markets outside of the U.S. and Canada. Strong demand in Asia and Europe should drive significant growth in the quarters to come. Lululemon helps grow brand awareness in these new markets by first opening showrooms and hiring local talent or ambassadors there. This way, they are collaborating with people who really know each specific market.

In Europe, Lululemon is set to open its first store in London next week. In the weeks leading up to this opening, Lulu's team in Europe has been hosting community events such as yoga at the Royal Opera House. In fact, 700 people lined up at the Royal Opera House hours before the event started -- proving there is plenty of pent-up demand for Lulu products in the European market.

Lululemon Athletica

Source: The Motley Fool

The company plans to open its second store in London by the end of 2014. Meanwhile, Lulu's general manager of Asia will be back in Hong Kong in the next couple of weeks to set up similar community events. Of the 69 showrooms Lululemon currently operates, 17 are located outside of North America with six in Asia and nine in Europe. The Canadian company finished fiscal 2013 with 254 total stores, up from just 211 stores a year ago.

Putting product first
In addition to global expansion, Lulu is getting back to its roots with a renewed emphasis on quality products and superior design. The company ran into a series of quality control issues last year that left it vulnerable to competitors such as Under Armour and Gap's Athleta brand. Specifically, Lulu's reputation for quality took a major hit when Lululemon was forced to pull more than 17% of its signature Luon pants from store shelves following an issue with sheerness.

The see-through pants recall ended up costing Lulu more than $40 million in revenue last year. Worse still, it also gave rivals room to swoop in and steal market share. In a bid to poach customers from Lululemon, Under Armour ran an ad campaign last year that was both timely and entertaining. For example, an ad for Under Armour's line of yoga pants included the slogan, "We've Got You Covered." Nevertheless, Lululemon is looking onward, concentrating on the product from both a design standpoint, as well as on the supply chain and sourcing level.

"Going forward we are refocusing the organization on being design led," Potdevin said. He went on to say there will be no compromising and that it will bring out the best in Lululemon going forward. Additionally, the company said it's pushing technical innovation with its new in-house White Space workshop. But former Lululemon customers don't seem so sure. Comments left on the White Space community board suggest consumers are still frustrated with the level of quality they're getting from Lulu's products these days.

The biggest challenge is yet to come
It seems Lululemon's biggest challenge will be in reigniting an emotional connection with its customers. With no switching costs and low barriers to entry in the athletic apparel industry, Lululemon doesn't have an economic moat to protect it from competitors in the space. Therefore, it could take some time before we see a turnaround in Lulu's stock.

In spite of this, I'm confident that Laurent Potdevin is the right man for the job. He seems to have a firm grasp of Lululemon's corporate culture and understands that authentically connecting with local communities is key to the company's future success.

All truly great products, be it Apple's iPhone or Lululemon's Luon yoga pants, have one thing in common: they forge an emotional connection with the customer. By focusing on creating a best-in-class guest experience, Lululemon may be able to regain customers that have been poached by rivals in the space.

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Tamara Rutter owns shares of Lululemon Athletica. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool 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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