A Small Step on lululemon athletica's Long Road to Recovery

lululemon athletica's disgruntled shareholders walked away from their lawsuit with nothing but memories, giving Lululemon one fewer headache to deal with.

Apr 8, 2014 at 10:19AM

There's a saying about juggling eggs and how they break, and maybe there's also something about yolks in there. Or if there isn't a saying, there should be one. After a U.S. District Court threw out charges leveled against lululemon athletica (NASDAQ:LULU), the company ended up with fewer eggs to worry about. A group of shareholders had accused the company of failing to properly maintain its products' standards and doing so knowingly.

In a rare display of legal common sense, Judge Katherine Forrest ruled, "It is only reasonable to assume that if Lululemon secretly knew that the (alleged) fix for its quality issues was simply to employ more people to wear its yoga pants and exercise, it would have done so -- rather than the alternative of losing $2 billion in market capitalization." 

The many eggs of Lululemon
In July last year, a shareholder filed a lawsuit claiming that Lululemon and the company's senior leadership purposefully hid defects from customers after switching to low-cost production methods and materials. The contention was that the company pulled back production costs in order to sell its products more cheaply, thereby preserving its market share.

The kerfuffle -- origins in an old Scottish word -- traces its roots back to the sheerness issues that Lululemon experienced in early 2013. It turns out that the fabric in some of its yoga pants became sheer when stretched. That's bad news.

Since the beginning of 2013, Lululemon has been fighting fires and losing market share to bigger competitors like Under Armour (NYSE:UA) who've swooped in to make a name for themselves in women's workout wear.

In the grand scheme of things, the end of a small legal battle is just a small blip on the Lululemon radar. The company's real challenge is to reconvince its customers that there's a reason they should be paying top dollar for Lululemon clothing, as opposed to jumping ship to Under Armour's cheaper women's line.

Fighting the good fight
In its last quarter, Lululemon's comparable-store sales fell by 2%, and the company forecast a small single-digit increase for fiscal 2014. Over the last fiscal year, a smattering of weak quarters led to a 16% increase in overall revenue. Meanwhile, Under Armour put up a 27% increase in revenue for the year. On Under Armour's earnings call, CEO Kevin Plank highlighedt the success in women's wear and said the company was "bullish" on its products going into 2014. 

Lululemon's challenge is to find a way back into the hearts and minds of its customers. While the business isn't there yet, I would argue that the addition of Laurent Potdevin in the CEO role is going to be a huge boost for the brand.

Founded by engaging but good-manners-challenged Chip Wilson, Lululemon thrived for a time under former CEO Christine Day. But Day was never a huge community engager, preferring to focus on the business side of the company. Potdevin, by contrast, comes to the company from TOMS, which is almost nothing but community driven. His presence at Lululemon should be a strong first step toward the company solving its bigger issues.

Getting this lawsuit out the way is still good news in that it allows the issue to truly be put to rest, but it's a small step. Potdevin and Lululemon are staring down intense competition for women's sporting dollars from Under Armour, and the company's biggest asset -- its community vibe -- needs a lot of work. I remain hopeful that things can get turned around, but it's not an overnight operation.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

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

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers