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Product Issues Continue to Plague Lululemon

By Andrew Marder - Sep 12, 2013 at 6:15PM

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Even though it has moved forward from the quality issues earlier this year, Lululemon has yet to completely move on.

Like a three-day downpour that completely wrecks your running schedule, the good intentions of lululemon athletica (LULU 0.44%) for last quarter were soaked by a forecast for softer sales in the second half of the year. The yogawear retailer is in the midst of executive changes, product issues, and an ongoing campaign to win customers' trust back, but none of the headway that it's made is going to be able to keep sales up.

While it's not alone, Lululemon is certainly suffering more than other brands have, due to its sheer potential. The company is trading at 35 times its trailing earnings, putting it well ahead of the retail average, and making it one of the pricier brands on the block. With expectations so high, even a seemingly small stumble can send the stock into a fall.

The shortcomings out to play
In the second quarter, Lululemon earned $0.39, easily beating out the $0.35 that analysts had expected. Success! It looks like the brand has bounced back from the quality issues that plagued it earlier this year, even as the company seeks to transition from its current management team to a new one. So, why did shares slide 6% in trading?

It all comes down to that darn forecast. Previously, Lululemon had been expecting to earn between $1.96 and $2.01 per share for the full year. In today's release, the company revised that estimate down to between $1.94 and $1.97.

Management said that the weaker expectations stem from the knock-on effects of the luon fabric issues it had earlier in the year. As a result of those problems, the company has been slow to get new products into the store, leaving summer items out through August. The third quarter has had a weak start, and now, Lululemon expects that weakness to carry on for the majority of the rest of the year.

Another opportunity?
So far, 2013 has been a boon for companies like Under Armour (UAA 0.32%) and Nike (NKE -0.53%), which have been working on getting their feet in the yoga door -- though that metaphor sounds odd. Both of the big apparel players have been pushing their own lines of studio and yogawear. Under Armour is combining its studio and bra line to try to increase its women's revenue. The ArmourBra especially has been driving strong women's sales for a while now.

Nike is working a different angle, combining its yoga pants and tops with yoga shoes, giving it a different approach to yoga, playing to the brand's biggest strength -- footwear. Nike has said that its women's strategy focuses on cross-selling between its lines.

Both companies are still in a good position to give Lululemon's customers a new alternative to the brand they know. I'll be looking for some strength in women's clothing from both Under Armour and Nike, due to the shortfall at Lululemon. At the same time, Lululemon has shown itself to be very resilient, and this might be a good buying opportunity if you still believe in the brand. Once CEO Christine Day's replacement is found, the company should be back on solid ground and ready to climb again in 2014.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
$317.80 (0.44%) $1.40
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$9.33 (0.32%) $0.03
NIKE, Inc. Stock Quote
NIKE, Inc.
$113.87 (-0.53%) $0.61

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