lululemon athletica Simply Can't Win

With a poor outlook, departing management, and infighting, lululemon athletica continues its downward spiral.

Jun 12, 2014 at 2:46PM

Here's what I imagine a bad week looks like for a business. First, your founder calls out your board of directors. Second, your chief financial officer announces his exit from the company, leaving you with a brand-new chief executive officer, a brand-new head of product, and a CFO search to undertake. Finally, you post your first-quarter earnings result, dropping your earnings per share by around 60%. Coincidentally, that imaginary week looks identical to the week that lululemon athletica (NASDAQ:LULU) just had.

Founder Chip Wilson kicked things off by voting against board chairman Michael Casey, who replaced Wilson after he stepped in a deep pile of PR last year. Now Lululemon is sitting on a 14% drop in its share price, giving investors a 40% decline over the last 12 months. Is there any reason to think that this is the end of Lululemon's hard times?

Community drives sales at Lululemon
In his angry letter, Wilson said that the Lululemon board had overlooked the long-term interests of the company by focusing on the short-term at the expense of "product, culture and brand and longer-term corporate goals." All of those points ring true for investors, who have watched Lululemon self-destruct over the last year as it has failed to adequately deal with customer concerns over product quality and community engagement.

The company has yet to recapture its core community, choosing to focus on simply releasing new products and saying that things are getting better. Customers are turning a deaf ear to those claims and instead leaving the brand for competitors like Under Armour (NYSE:UA). Under Armour has scooped up female athletes, focusing marketing and product developments on them and, more important, engaging women by changing the layout of stores and increasing the amount of one-on-one training that the company offers.

The impact of shortfalls for Lululemon
In its fourth-quarter release, Lululemon said that it expected earnings per share to be in the $0.31 to $0.33 range. Taking out the company's repatriation of some foreign cash, it turned in $0.34 per share. Instead, accounting for the tax hit required for the repatriation, it hit $0.13 per share, which is probably part of the reason investors were so taken aback.

Lululemon also dropped its annual earnings per share estimate -- excluding the tax issue -- from between $1.80 and $1.90 down to between $1.71 and $1.76. Contrast that with Under Armour, which raised its annual outlook for revenue and operating income in its last quarter. The sharp divide between the two businesses just goes to highlight how weak Lululemon looks right now.

All is probably not lost, but it's not looking good. Lululemon has to find solid ground to rebound off, and that ground is a strong community of consumers. Unfortunately, the company seems set on simply launching new lines in order to bring in new customers without first fixing its foundation. Under Armour is in the comfortable position of not having alienated its customer base, and so it can focus on products and marketing in way that Lululemon can't. For now, I can't see any reason to invest in Lululemon, which continues to record bad news and bad results.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica and Under Armour. The Motley Fool 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.

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