Will lululemon athletica Finally Get Off the Mat?

Source: lululemon athletica.

This article originally appeared as part of ongoing coverage in our premium Motley Fool Hidden Gems and Motley Fool Rule Breakers services...we hope you enjoy this complimentary peek!

Yoga apparel specialist lululemon athletica (LULU -1.26%) has seen its share of struggles over the past couple years, having gone from a growth darling of the stock market to a trouble-plagued retailer with persistent customer-service concerns. Even as the company tries to move past its recent woes, most investors don't expect earnings growth from the retailer to return until next year at the earliest. As competitors Gap (GPS 0.55%) and Under Armour (UAA -2.34%) make their own forays into the key yoga demographic, shareholders question whether Lululemon can regain its traditional stranglehold over this retail niche.

Yoga is a relatively recent phenomenon to hit the athletic apparel industry, with Lululemon having been founded just 16 years ago. As Motley Fool co-founder David Gardner noted in his original recommendation of Lululemon in 2010, the retailer's emphasis on fitness, awareness of ecological principles, and commitment to interacting more deeply with customers resonated with its target audience and produced exceptional growth early in its history. But a product recall and successive gaffes from various company personnel have done lasting damage to Lululemon's brand. Let's take an early look at what's been happening with lululemon athletica over the past quarter and what we're likely to see in its earnings report set to be released on September 11. 

Stats on lululemon athletica

Source: Yahoo! Finance.

Can lululemon athletica get itself back to an upward-facing pose?
Despite Lululemon's best efforts, investors haven't regained confidence in its earning power yet. Expectations for the fiscal second quarter's earnings have fallen by 20% over the past few months, and those negative trends are seen persisting next year as well. The stock has made no headway, falling another 9% just since early June.

Lululemon's troubles continue to stem from its production of too-sheer yoga pants in early 2013. In his recommendation of the stock earlier this summer, Fool analyst and Hidden Gems co-adviser Seth Jayson noted how the mishap evolved into a full-blown fiasco, with the initial recall leading to allegations of poor quality in its products and ultimately to the resignation of CEO Christine Day. Late last year, founder and former board chairman Chip Wilson made a huge mistake by suggesting that the company's problems had as much to do with the body shapes of Lululemon's customers as with the products themselves. Wilson gave up his board chairmanship in response, but top executives still seem to disagree about the company's future direction.

Source: lululemon athletica.

Fiscal first-quarter earnings for Lululemon failed to mark the end of the retailer's crisis of confidence. Same-store sales in its retail locations fell 4%, and even the company's e-commerce operation only saw total comparable sales gain of 1%. Revenue growth of 11% showed the extent to which Lululemon's sales ascent has decelerated; worst of all, Lululemon's earnings guidance included reductions both for the second quarter and for the full fiscal year. News that CFO John Currie will retire later this year further added to the uncertainty about Lululemon's future.

However, Lululemon has taken steps to redeem itself in the eyes of its customers. New quality-control initiatives aim to prevent further reputation-damaging recalls, and Lululemon has expanded its scope with successful launches of products for men and for young girls. Those areas contribute only a small portion of overall sales compared to the core women's segment, but it's still encouraging that Lululemon has moved forward with efforts to reach a larger customer base.

In the lululemon athletica earnings report, investors need to watch for signs of success from the retailer's strategy to restore its brand strength and fight rising competition from Gap, Under Armour, and other players in the yoga and women's athletic apparel segment. After mistakes of this magnitude, Lululemon won't fix all of its problems overnight, but it needs to demonstrate progress toward that end goal in order to reassure shareholders that it can get back on track to growing at its former pace again.