A LULU of a Lemon?

Some questions have been swirling around lululemon athletica (Nasdaq: LULU  ) lately. Although the recent seaweed debacle brought an infusion of doubt to investors, there are a couple of other signs that maybe the investing case for lululemon is a bit shaky.

When green goes bad
Talk about hot yoga. Some questions have been raised ever since The New York Times reported that independent testing of lululemon's VitaSea fabrics showed no difference to cotton when it came to the mineral levels described. According to the article, lululemon founder Dennis "Chip" Wilson was quoted as saying something along the lines of his only evidence that the fabric contained seaweed was that when he wears it, it just feels different.

Canada's lululemon has removed label's claims of therapeutic benefits from VitaSea, but it's standing by its contention that the material contains the fibers it claims. However, I'd guess the most authentic, least faddish of its customers may feel just a tad leery.

Many companies may be all about green aspirations these days --consider Google's (Nasdaq: GOOG  ) recent push into renewable power -- but those that appear to be "greenwashing" for marketing purposes will probably be metaphorical toast with exactly the people they're trying to impress.

Say what?
Other things may not be as they seem at lululemon. MarketWatch's Herb Greenberg made a recent blog posting about how lululemon's CEO, Bob Meers, appears to have fudged his resume a bit, claiming to have had slightly different (and slightly more impressive) titles at Reebok and its Rockport and Greg Norman brands than he actually did.

I was leery of lululemon from day one, although my reasoning was far more simplistic. When I first heard about the upcoming IPO, I simply wandered around the company's website. When I ran across founder Chip Wilson's blog, which rambled about things like The Secret and what struck me as rather dubious connections between the sexual revolution, The Pill, surf culture, SuperGirl, cigarette smoking, breast cancer, and yoga, I pretty much dismissed lululemon. (That dismissal was bolstered by the recognition that lululemon has plenty of competition, something Wall Street types high on the stock a few months ago didn't seem to realize or address. Just for starters, what about rivals like Liz Claiborne's (NYSE: LIZ  ) prAna and VF's (NYSE: VFC  ) recent purchase of Lucy?)

As hot as candid CEO blogs are these days, there's a difference between thought-provoking philosophizing and trendy pseudo-intellectualism. For example, I've always really enjoyed Whole Foods Market's (Nasdaq: WFMI  ) John Mackey's blog (his corporate one, not the now-infamous anonymous postings), which I think has shown an understanding of economic theory, psychology, the company's target market, and some visionary ideas.

On the other hand, my gut reaction to the lululemon blog was that I really didn't need to get in on that particular IPO. (OK, my gut reaction found it pretty entertaining, too.)

Sometimes a hunch is enough
The way things have been unfolding, you've really got to wonder what's going on at lululemon, even beyond the simple idea of brand authenticity. Herb Greenberg's right on to shine a light on what may be a tendency to exaggerate -- that kind of corporate behavior really doesn't inspire much confidence in what might come to pass down the road, and committed shareholders don't look fondly on things that are "partially true" or "stretched a bit." Be sure to check out lululemon's quarterly results tomorrow, but investors should ponder whether they feel confident in what will transpire over the long term, because that's when everything comes out in the wash.

I may have had a hunch that lululemon wasn't my kind of stock several months ago, but no, hunch-driven investing certainly isn't a replacement for a hard look at operations, financial statements, growth, ratios, and the overall market for a product or service. However, such hunches can be good reasons to continue researching a stock or to toss a stock idea aside to move on to more promising ones. Like fish in the sea, there are lots of stocks out there; I've had a hunch this was a good one to throw back.


Read/Post Comments (7) | Recommend This Article (7)

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  • Report this Comment On November 28, 2007, at 9:29 PM, rcaelius wrote:

    There are some very good points in this piece, and the reports on resume-fudging and greenwashing from the very top of the company are very worrying indeed. The argument about the incoherence and ramblings on founder's blog seem less relevant to me. Many founders have some weird and sometimes quirky ways of doing things, which aren’t necessarily bad for the company, for instance who would have thought 5 years ago that donning a white labcoat when assessing business presentations by groups of staff would be a great idea? If the founders are not in the role of CEO's then I think they should be measured on their contribution to the firm, which in this case would be product design.

    This brings me to a bit of additional information that I consider relevant in the context of LULU, which is not mentioned above - Product quality. I personally think that that the fabrics used by LULU simply feel and fit better than any other brand of yoga clothing that I have tried (namely Adidas, Puma and Nike). It would be hence a very interesting test to see how many customers (or $$) are from repeat purchases. If other buyers think the product is really that good then the “going back for more” factor would be a very good indication of that quality perception. Researching this information would be rather helpful in getting an indication of the longer term success of the brand, the author refers to in the article. (And would also help assess the risk associated with such mishaps as the seaweed debacle.)

    The second item that I feel is not fully covered in this analysis is market growth for hot yoga. There seems to be data available based on estimates for circulation of yoga magazines and number of stores / studios opening up etc., however, some more detail on the predicted development both nationally and internationally would provide a useful additional context in which to assess the potential of this stock.

    (I own shares in LULU and live in Vancouver)

  • Report this Comment On November 28, 2007, at 9:43 PM, kevingibb wrote:

    Nice clothes. Too bad that the stock is so overpriced. Seems to confirm Jeremy Siegel's contention that investors do badly buying growth stocks, as their prices are too high.

    Aside from branding and pretty good execution, there is not much of a barrier to entry to keep others out of the business. So I am doubtful of the franchise value.

  • Report this Comment On November 28, 2007, at 10:22 PM, ssouci wrote:

    Bash Lululemon all you want, "fools". I've been buying their clothes for several years now and am really impressed. The quality is always great and the stuff lasts for years of hard use, unlike cheapo athletic wear. Looks great too!

    This past weekend, I went shopping at one of their stores here in Vancouver, and noticed two things.

    Firstly, the amount of seaweed-based clothing was pratically nil. It looks just like regular material and the tags are now modified, so this really is (or was) a non-issue. The seaweed incident probably gave Lululemon more press than the IPO! (and at no cost) I've never heard more people talking about it, and that can only help to spread the word. No one seems to care from what I can tell.

    Secondly, the store was PACKED with about 20 shoppers and 5-7 people lined up to pay. I was in a mall with many similar stores, and Lululemon was BY FAR the busiest. When I left, more people were coming in, and I later saw a man walking around with 2 large (filled) Lululemon bags. I was pretty surprised. BTW, I bought a $100 pair of yoga pants. They feel great, look awesome and I love them.

    What more can be said? Lululemon is HOT, and has been so for many years here in Vancouver where it had demonstrated proven staying power.

    Is LULU overpriced? No way folks -- it's just getting started.

    -- Sandra

  • Report this Comment On November 28, 2007, at 10:54 PM, pakaal wrote:

    Aloha,

    I got in on the IPO (small amount), and it's grown 30.64% on me in the meantime. Then on the other side you have the "naked shopper event", Chip's nutty Blog and now the "seaweed debacle".

    I think in the end this comes down to two separate issues, company success (I don't see much sign this stock is behaving differently from most of my other investments, weathered August well, and it's gaining again), and the investor's desire to invest in the "right" companies, "right" being a different value with each person.

    Personally speaking, some of their marketing schemes have seemed a bit dodgy, and after reading this article I'm considering just selling it and putting the investment somewhere else. Just 'cause I'm not sure I want to invest with those kind of people. But again, that's just personal, I think the company has great potential from here on out.

    By the way, I didn't get the sense that those four statements on the LuluLemon site are really "Chip's Blog" so much as company statements rebranded (they use the word "Manifesto" on the main page that links to them). Granted, the homage to "The Secret" was out there, but sincere or not I get the feeling it will appeal to a lot of shoppers.

  • Report this Comment On November 29, 2007, at 3:16 PM, n1ckels wrote:

    I've been deep into the iyengar yoga scene for 3 year, and any serious yogi knows lululemons clothes are the best. Nothing from Nike, Under Armour, et al. even comes close. Just ask your friend who is most into yoga (seriously!). This stock is not overpriced. I've dreamt of this IPO for years! You'll see how fast women start copyin their cool yoga friends' outfits. Their clothes fit and feel amazing, and really are so different than anything else out there in terms of design, fit, and styles. I've never disagreed with Alyce more...I can't wait to talk in a year, when I'm a lot richer off the company!

    Nick

  • Report this Comment On November 29, 2007, at 5:05 PM, ssouci wrote:

    Awesome results today -- and the stock went up. Like I said, LULU's just getting started.

  • Report this Comment On November 30, 2007, at 12:33 PM, TMFLomax wrote:

    Thanks for the feedback. It's good stuff. Believing a company has true competitive advantage is indeed a powerful argument. So I appreciate that many of you disagree with me on this one and I enjoyed reading all these thoughts.

    Oh n1ckels, I did ask a friend who's very into yoga about lululemon -- she said she likes their stuff but also mentioned prAna. And a male friend of mine who does yoga said, "What do you mean, you can't just wear sweatpants?" LOL.

    Anyway, my colleague Rick Munarriz wrote about LULU's quarter yesterday. He's more positive on this company than I am so you might want to check out his article.

    Again thanks for all the thoughts, everyone.

    Alyce

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