The same story has played out countless times: A dominant company faces disruption and chooses to bury its head in the sand. Lululemon Athletica (LULU 5.18%), once untouchable atop the athleisure industry, fell into that common trap. Competition from upstarts ate the company's lunch as innovation stalled, and the trend of younger consumers shifting away from the tight leggings that have defined Lululemon's brand was ignored for too long.
While Lululemon grew sales by 7% year over year in the second quarter, comparable sales grew by just 1% and declined by 4% in the Americas. New retail stores and international expansion drove revenue higher, but earnings declined amid weak sales in the core U.S. market.
Lululemon is undoubtedly struggling, and an uncertain economy isn't helping. But there's one great reason to buy the stock this month: The company has finally come to its senses and set its sights on a revival.
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Putting an end to complacency
Lululemon made a point last year to launch new styles and color combinations in a bid to appeal to customers, but that strategy didn't go quite as planned. Specifically, the new colors were a dud, prompting the company to do a deeper dive on its product assortment.
During the second-quarter earnings call, CEO Calvin McDonald came to the same conclusion that many Lululemon customers had already reached: The company had become complacent and predictable. Product life cycles in core categories had become too long. As those products became stale, competitors were creating new trends and leaving Lululemon behind.
McDonald concluded:
My view now is that we have relied on the same product playbook across certain categories for too long. The competitive landscape is different today than it was even two or three years ago. While no single competitor is having a meaningful impact on our business, there are now many players in the market.
The plan is to increase the number and frequency of new styles. Lululemon is aiming for new styles to account for 35% of its overall assortment next spring, up from 23% today. A "reset" of many of the company's product development practices is underway, with a goal of moving faster and keeping up with changing consumer preferences.
Lululemon's brand is still strong, and the company has around 30 million loyalty program members. The company has dragged its feet on making these product changes, and that has hurt the brand to a degree. But it's not too late to recover. Lululemon is finally recognizing that some new colors aren't enough to fix its problems. A return to real innovation, and a shift from missing trends to creating them, can reignite the company's growth.
With Lululemon stock trading for roughly 13 times forward earnings per share based on the company's guidance, now is a great time for long-term investors to bet on the company's turnaround.
