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3 Surprising Takeaways From Lululemon Athletica Earnings Call

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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.

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.

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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Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 29, 2014, at 12:30 PM, plange01 wrote:

    lulu is one of the most successful retailers in these troubling times and its stock is extremely cheap and a buy up to the mid..70's

  • Report this Comment On March 29, 2014, at 1:01 PM, etbob1 wrote:

    lulu is headed to 100 dollars per share.

  • Report this Comment On March 31, 2014, at 8:12 AM, apositt wrote:

    Besides, intense competition, LULU will not lose the identity of being a women's apparel company. They need, and will not get, men to buy their product in any significant way. (The occasional jock TV commentator says they "bought a few pair" but this is lame and won't cut it.) Furthermore, their declaration for "grass roots" promotion is an admission that they lack the capital for big advertising (which they do need) since they will be spending their cash on expansion into foreign markets - a very expensive endeavor that's only in its first stage. As a result, their growth will be slow at best. This will be apparent when they report for their next quarter results.

    Therefore, LULU is a trade for the next week or two at most up to its 52-week high. At that point, smarter heads will prevail and understand that LULU is no where near as poised for greater things as certain "interested" analysts would suggest.

  • Report this Comment On March 31, 2014, at 9:51 AM, apositt wrote:

    Regarding my above post, I meant LULU might trade up to its recent high of 57/58 not its 52-week high.

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Tamara Rutter

I've been an analytical writer for The Motley Fool since 2011. I cover the sectors of Consumer Goods, Technology, and Industrials. Connect with me on Twitter using the handle, @TamaraRutter -- I'd love to hear from you!

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