Lululemon Athletica Lays Out the Road to Recovery

Besieged by bad press, Lululemon finally has a good day at the office.

Mar 30, 2014 at 1:00PM

Back in January this year, lululemon athletica (NASDAQ:LULU) had some bad news -- the fourth quarter wasn't looking good. Comparable sale were going to be down, the company was going to bring in less revenue than previously expected, and earnings were going to take a hit, coming in at between $0.71 and $0.73 per share. The stock dropped on the announcement, falling 16% on the day.

Yesterday Lululemon said -- and I'm paraphrasing here -- "Hey! It's not all that bad! (But it's still not great.)"

Lulu
Source: Lululemon Athletica

Lululemon's fourth quarter
Since it's precipitous drop, Lululemon has been relatively flat. Investors have bought into the narrative that the business is having a hard time -- a narrative that's true -- and have held off on the brand, seeking out competitors like Nike (NYSE:NKE) and Under Armour (NYSE:UA) instead. In its fourth quarter, Lululemon had a lot to prove.

First, it needed to show the world that it could get its woefully inadequate product oversight back in line. On the earnings conference call, new CEO Laurent Potdevin said that the company was "seeing a constantly increasing level of [its] product meeting [its] very high quality standards." 

Refocusing on quality gave the business the breathing room it needed in the fourth quarter. A period without any major quality issues, resignations, or bad press helped boost Lululemon beyond its original expectations. Comparable store sales were down and margins were down, but earnings per share were flat with last year at $0.75. 

Laurent Potdevin's grand plan for Lululemon
Potdevin came to Lululemon from TOMS, the semialtruistic shoe, glasses, and coffee seller. In his first quarterly call, Potdevin indicated that he had a bigger vision for Lululemon that required breaking out of the traditional, grassroots mold that has defined the business for so long.

For Potdevin, the old ways have run their course. This new version of Lululemon is going to move beyond the traditional grassroots market program, but not onto television or other traditional platforms. Instead, Lululemon is going to continue to try and reach customers through videos and community interaction, but with an increased focus on having a specific voice in those channels. 

Challengers to the Lululemon plan
It's a strategy that makes sense for Lululemon and could help it claw back into the hearts and minds of its core demographic. As Potdevin said on the call, "[Unlike] a few years ago, [Lululemon is] not the only game in town." 

Last year was marred by every conceivable brand mistake that a company could make, from product issues to bad public relations to unstable leadership. All of those slips gave Nike and Under Armour additional footholds in the studio and yoga space.

Nike has opted to focus on building a community of female athletes to rival the Lululemon that many women feel let them down in 2013. Nike has had success with its Nike Training Club, which has helped push women's sales growth ahead of men's. The business is hoping to have 50 training locations up and running -- ha! -- by the end of 2014.

Under Armour has focused on product instead of community, piggybacking on the existing strength of its Armour Bra line. The company has seen a shift in its consumers who are now "increasingly wearing 'athletic product' outside of the gym." Workout clothing as fashion statement was Lululemon's bread and butter until its brand collapse last year.

2014 for Lululemon
If Lululemon wants to end the year in a much stronger position than it started with it's going to have to get back on top of its messaging and product. Obviously, all the quality issues need to be kept under wraps, with nary a stitch out of place. On top of that, though, Lululemon needs to get its name back out there. It has to demonstrate that it makes good products and that it's building a community of like-minded athletes. If it can't do that, Nike and Under Armour are just going to continue growing their share of the market until Lululemon is nothing more than an also-ran.

Potdevin has the background to make the brand strong again and, with new employees running the product side, quality shouldn't be an issue anymore. I'm cautiously optimistic that 2014 can be a solid rebuilding year for Lululemon, setting it up for success in years to come. I'm not expecting a miracle, but I'd be surprised by another disaster.

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Andrew Marder has no position in any stocks mentioned. 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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