Athletic apparel company Lululemon (LULU 1.33%) has started spring on a high note. The fourth-quarter report and conference call caused the company's shares to close up 6% that day. Also, the company has now prevailed in lawsuits which stemmed from last year's yoga pant recall fiasco. Lululemon's controversial founder has stepped into the background and a new CEO has taken the reins. Will the good times last and keep Lululemon ahead of competitors that include Gap (GPS -1.59%) and L Brands (BBWI 0.43%)?
Lululemon's fourth quarter included net revenue of $521 million -- up over 7% year-over-year -- which bested the $515 million consensus estimate. The company also topped the consensus earnings per share estimate of $0.72 with a reported $0.75. This marks the fifth quarter in a row that Lululemon has beaten the revenue and EPS estimates.
However, the company still has to overcome the tidal wave of bad press from last year. Here are three ways in which Lululemon will try to redeem its reputation in 2014.
1. Decreasing scarcity while improving quality
Lululemon has focused on a limited stock inventory model that is meant to drive demand. However, the yoga pant recall last year showed the weakness in this model. Sheer material led to the recall of about 17% of the popular Luon pants. Replacement pants took longer than expected to hit the market, which left shoppers without the matching bottoms to tops that were in stock.
On the fourth-quarter conference call, new CEO Laurent Potdevin said, "While we don't mind our guests being hungry for our product, we don't want them to starve for it."
Keeping guests from "starving" will come down to finding a balance between the core and seasonal styles -- the latter of which has come to dominate Lululemon's overall sales. It's a balance that the company needs not only to satisfy customers in the short-term, but also to create some wiggle room if another product recall were to happen in the future.
Lululemon has also paid lip service to improving quality control so that a Luon pant incident doesn't happen again. However, the company will have to prove that it has this ability with time. For a brand renowned for quality, the recall issue raised serious questions about whether the production process had changed. That's a nervousness that will only quell if the company avoids similar problems this year.
2. Vital expansion overseas
At the end of the fourth quarter Lululemon had 254 total stores, with 199 belonging to the base used for comparable-store sales comparisons. Of those base stores, 65% are located in the United States. In comparison, Gap has 3,100 total stores and L Brands-owern of Victoria's Secret and Bath and Body Works- has nearly 3,000 stores. So Lululemon has a much smaller footprint overall.
Lululemon's comparable store sales has trended downwards in recent years.
2010 |
2011 |
2012 |
2013 | |
---|---|---|---|---|
Q1 |
35% |
16% |
25% |
7% |
Q2 |
31% |
20% |
15% |
8% |
Q3 |
29% |
16% |
18% |
5% |
Q4 |
28% |
26% |
10% |
-2% |
Lululemon needs to move past the controversies of last year with a better supply chain, no quality issues, and a muzzle for Chip Wilson. However, expansion abroad will serve as the major test for the company-and its new CEO.