2 Reasons lululemon athletica Could Bounce Back

At Lululemon's Analyst Day last week, CEO Laurent Potdevin said that the casual wear and international expansion would help drive the company's growth.

Apr 22, 2014 at 11:51AM

For investors hoping lululemon athletica (NASDAQ:LULU) would return to its old tricks this year after the debacle that was 2013, results so far have been less than inspiring. The stock is down 17% since New Year's as fourth-quarter results disappointed, and comparable-store sales slipped into the red for the first time since 2009. 

The response to new CEO Laurent Potdevin seems to be middling as well. Shares fell 5% Monday following a cool reaction to Potdevin's first Analyst Day. Sterne Agee analyst Sam Poser said the presentation lacked any clear strategy; he maintained a sell rating on the stock, saying in a note, "A detailed constructive strategy, beyond the improved product, not just words, is needed to rebuild the aspirational quality of the Lululemon brand." While there may be no silver bullet for Lululemon to return to quality, the brand has been innovating. 

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More than just yoga
Lululemon recently stretched into its own version of casual wear with a unique line of clothes it calls &go, which Potdevin said would be a significant growth opportunity for the company. The gear is more casual in appearance than Lululemon's regular exercise clothes, and is meant to be used for both working out and everyday activities. The apparel includes leather-looking shorts and leggings made from a stretchy material called Warpstreme, as well as dresses, skirts, and peplum tops designed for women to wear straight from "daybreak to midnight," Chief Product Officer Tara Poseley told the Daily Mail. At the Analyst Day presentation, Potdevin commented on the "recent success" of the line, which he said "speaks to the elasticity of the brand." Six of the line's 12 items available online sold out in less than a day. Still, some analysts have questioned the apparel expansion, saying the company is getting away from its core brand offering, while other critics have mocked the idea of not changing out of your workout clothes.   

London calling
The product line isn't the only thing about Lululemon that is expanding. The company earlier this month opened its long-awaited first store in Europe, in London's Covent Garden. In characteristic fashion, the company held an pre-opening yoga event at the Royal Opera House that drew 400 participants, will offer free yoga classes and group runs at the store, and uses its typical tongue-and-cheek tone in local marketing. The Covent Garden location is the company's first full-on store in the British capital, but it had previously established its brand there via three showrooms. One Lululemon ambassador said 25% of people at an average London yoga class are dressed in the high-performance gear, and Potdevin said initial sales had exceeded targets by 60%.

London isn't the only European market that Lululemon is priming -- it has showrooms in Berlin and Amsterdam and has been selling its wares online for years across the Atlantic. Asia may represent an even more promising opportunity, as early reports have indicated particularly high demand in Singapore. At the company's last earnings call, Potdevin said demand was strong in both Asia and Europe, and that several countries in those regions were ready for stores. 

Foolish takeaway
While Lululemon's stock price has been glued to the mat, the company is taking steps to move past its forgettable 2013. At a P/E of 25, shares are about as cheap as they've been in years. The company's guidance for the year was weak, and one strong international opening won't make up for sluggish sales at its North American stores, but the &go line and the London opening are reminders that Lululemon is still in its growth phase. The company faces competitors galore, but demand for yoga and athletic apparel has also grown as Lululemon has changed women's fashion. Plenty of challenges remain, but it's foolish to assume the company's growth days are over when so many new markets remain ripe for the picking. Look for updates on international expansion, the London opening, and the &go line in its next earnings report. An optimistic outlook could send shares flying once again. 

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica. 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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