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Can Lululemon Athletica Stretch Its Growth?

Source: Lululemon

Lululemon athletica (NASDAQ: LULU  ) shares have fallen nearly 35% in 2014 as the company continues to struggle past its spate of problems that occurred last year. The yoga-apparel company has had a CEO resignation, product recalls, public relations disasters, the withdrawal of its controversial founder, and the eventual placement of a new CEO. With all of this drama one has to wonder if Lululemon still has growth potential -- or if the company will become sidelined by competition from the likes of Under Armour (NYSE: UA  ) and Gap (NYSE: GPS  ) ?

Customers wary of quality issues 
Lululemon found success by offering limited run, premium-priced yoga apparel that was noted for the quality of fabrics and design. The company deeply integrated its products with the local yoga community -- through free classes and teacher partnerships -- to further push that brand bond. Unfortunately, that customer trust was threatened with quality-control issues.

The issue garnering the most press was last year's black Luon pant recall, which triggered the recall of about 17% of the stores total bottoms inventory due its sheer fabric. This is on top of customers having previously complained about bleeding dyes. The Luon recall was followed with complaints of pilling, which prompted founder Chip Wilson to blame that problem on the thighs of women wearing the pants. 

So Lululemon has lost some of its high-quality, aspirational brand sheen. And while the company struggled, competitors rose up to take more of the market. 

Minding the Gap (and Under Armour) 
Gap and Under Armour aren't as fashion-forward and aspirational as Lululemon's products -- but both brands have broader ranges of merchandise that continue to attract devotees. 

Casual-wear stalwart Gap launched its Athleta stores nearly five years ago and hopes to have 100 locations open in the United States by year-end 2014.   That's not a fantastic growth rate even compared to Lululemon, which has existed since 1998 and only had 252 total stores by year-end 2013. But Gap does offer a clear advantage when it comes to product prices. 

And Gap and Under Armour both offer broader product ranges that appeal to a wider customer base -- and make it easier to expand the brands into more communities. Under Armour has particular expansion potential abroad, which only accounted for about 10% of overall revenue in the first-quarter report.

 Under Armour's share price has risen more than 100% in the past year even as the company hit some problems with global athletic- competition appearances. The company received well-publicized flack from the U.S. speedskating team during the Winter Olympics, with the athletes blaming Under Armour's newly designed suits for the team's poor performance. And the brand is nearly absent from the World Cup with Nike taking center stage.

 Under Armour still beats both Lululemon and Gap in terms of professional sports branding. And that branding comes with even greater name recognition around the world. 

Foolish final thoughts
Lululemon still has a struggle ahead in proving its devotion to quality control. This weak time for the brand has given the competition time to move in on the market --and customers time to see what those competitors have to offer. And Lululemon's niche focus will limit expansion possibilities more than the broader product ranges of Gap and Under Armour.

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Brandy Betz

Brandy Betz has written for The Motley Fool since 2011 and primarily covers health care, ETFs, and dividend stocks. You can follow her on Twitter @BrandyBetz.

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8/28/2015 4:00 PM
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