After lululemon athletica's (LULU -1.23%) dismal 2013, a year that featured a massive product recall, embarrassing remarks on women's bodies from its founder, and the surprise resignation of its CEO, 2014 was supposed to be the year it bounced back.
Despite bringing in a new CEO and opening its first European store in London, however, the stock has continued to struggle. After sliding 22% in 2013, the stock has lost another 29% this year. Let's take a look at some of the issues plaguing the yoga apparel retailer and how it could finally recover after nearly two years of under-performance.
Store traffic hasn't returned
Of all of Lululemon's operating figures, the continuing drop in same-store sales is the most disconcerting. Through two quarters this year, comparable sales have fallen 5% in constant dollars, meaning the company is seeing sales fall considerably at stores that have been open for more than a year. Just a few years ago, this company was showing off comps in the 20% to 30% range, a sign of its brand power, but today's lagging comps seem to indicate that customers are moving on. Countering that drop has been an increase in online sales, but that hasn't been enough to stem a 320-basis point drop in operating margin this year to 17.8%.
A solid increase in same-store sales will be the clearest sign that the brand has recovered and can justify its growth ambitions once again.
Founder Chip Wilson is still making trouble
Last year, Founder Chip Wilson stirred up controversy by saying that some women's bodies weren't right for its clothes, in response to complaints about pilling in the fabric of the yoga pants.
This year, after stepping down from the Chairmanship, Wilson took aim at Lululemon's own board, announcing in June that he would vote against outside members, Chairman Michael Casey and Director RoAnn Costin. Wilson explained his position by saying, "I am concerned that the Board is not aligned with the core values of product and innovation on which lululemon was founded and on which the company thrived," and added, "Board representation is heavily weighted toward short-term results at the expense of product, culture and brand and longer-term corporate goals."
As rumors circulated that Wilson was gearing up to take the company private, he instead sold half of his 27% stake in the company to private equity firm Advent International. Advent gained two seats on the board as part of the deal, and Wilson agreed not to wage a proxy battle for the next two years.
Though that chapter is now in the past, Wilson's antics confirm any doubts that Lululemon investors already had about the brand's mismanagement. Separately, Wilson's wife and son recently launched a new clothing brand called Kit and Ace, which plans to expand to 100 stores by 2019, an indication that the Founder's focus may have moved on to other projects for the moment.
The PR gaffes haven't ended
No stranger to controversy, Lululemon found itself in trouble again in October when the opening of its Buffalo store was marred by a floor mosaic that invoked two of the city's sports tragedies with the phrases "Wide Right," and "No Goal." Several Buffalonians took to Twitter to vent their ire at the company, calling for a boycott of Luluemon among other things. After explaining that the mosaic was meant as a reference to events that showed Buffalo as a proud and loyal community, Lululemon apologized for the artwork and said it would be removed.
While the incident itself should not have a significant effect on Lululemon's results, it is further evidence of a company that seems to keep misreading its customers.
Can the stock do another sun salutation?
Five years ago, Lululemon was alone in the luxury yoga apparel market, but that's not the case today. Gap's Athleta is planning to grow to 95 stores by the end of this year, and rivals such as Nordstrom, Nike, and Under Armour are all planning a greater push into the women's market.
Even with results down this year, Lululemon is an enviable position with 18% operating margins and a spotless balance sheet, but the stock won't make a comeback without the brand going first. And with competition heating up, negative press continuing, and a big question mark over current management, a turnaround doesn't seem near for Lululemon.
The company needs a renewed marketing push to remind customers of Lululemon's quality and what the brand stands for. This holiday season presents the perfect opportunity for such a move as the retailer makes as much as 40% of its revenue during the holiday quarter. As it says on Lululemon's manifesto: "Life is full of setbacks. Success is determined by how you handle setbacks."
