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3 Reasons I'm Ignoring Lululemon Athletica, Inc.'s Weak Guidance

By Steve Symington – Mar 28, 2014 at 11:41AM

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For the first time in over a year, Lululemon shares rose after the company turned in weaker-than-expected guidance. Here's why.

Well, color me surprised! For the first time in over a year, shares of lululemon athletica (LULU 1.70%) actually gained ground following better-than-expected quarterly results yesterday. Despite Lululemon's weaker-than-expected forward guidance, the stock rose by as much as 10% early Thursday before closing the day up 6%.

Don't get me wrong: I'm not complaining as a Lululemon shareholder myself. But going into the report and given Lululemon's woes over the past year, I feared the market might once again react unfavorably if guidance failed to give weary investors a light at the end of the tunnel.

After all, despite beating expectations in each of its previous four quarters, shares plunged every single time: once thanks to the unexpected resignation of former CEO Christine Day and three times because of -- you guessed it -- disappointing guidance.

On that note, we did receive our light at the end of the tunnel yesterday morning, and it came from the words of new CEO Laurent Potdevin.

Lululemon's new CEO, Laurent Potdevin, Credit: Lululemon.

The sincerest form of flattery
First, without naming names, Potdevin touched on Lululemon's rising competition:

The minute we add exciting new seasonal product to our assortment, the response from guests is astounding. However, unlike a few years ago, we are not the only game in town. And while we created this category and continue to lead it, we understand that our guests have choice, and sustaining that loyal relationship is a priority.

We all know he's referring to the likes of Under Armour (UAA -0.78%) and Gap's (GPS 1.81%) Athleta brand, both of which are striving to steal market share. Athleta, for one, enjoys the benefits of Gap's scale and ample supply chain experience, which enables it to offer a compelling value proposition with significantly lower price points to consumers.

And when Lululemon's former chairman, Chip Wilson, unapologetically blamed certain women's body types for pilling in some of its pants, Under Armour CEO Kevin Plank promptly seized the opportunity to remind consumers that Under Armour's products were "designed for all shapes."

Still, using words reminiscent of Under Armour's leadership in the performance athletic apparel space, Potdevin insisted:

As we get back to our roots, we're really focusing on innovation. I don't want to spend too much time worrying about our competitors. I certainly want to know what they're doing. It's validation of the strength of our market and its global relevance and its growth in every single global market.

The "heart" of Lululemon
In addition, after heaping praise on his employees for their passion, Potdevin recognized Lululemon's self-inflicted wounds by stating, "As we move into 2014, we are reflecting on our learnings with humility, and are entirely focused on our future."

He elaborated:

lululemon's magic has been built by creating technical beautiful product and sharing our distinct culture with our communities. The emotional connection that lululemon creates is at the heart of what we stand for, and we are being relentless in our commitment to delivering a distinct and authentic experience that is unlike any other.

Now before you go rolling your eyes at Potdevin's flowery language, hear me out.

Remember, he was introduced as Lululemon's CEO in December through a clever video that quietly pointed to his previous experience. That includes cutting his teeth at Louis Vuitton parent LVMH, capping a 15-year stint at Burton Snowboards with five years as its president and CEO, then serving as president of socially-conscious shoemaker Toms for the past three years.

Laurent Potdevin at Burton. Source: Burton Snowboards.

What do these companies have in common? They all boast fiercely loyal customer bases built on tremendous emotional connections with their respective brands. Given Lululemon's background using grassroots campaigns to build relationships with individuals like yoga instructors, it's unsurprising that Potdevin ended up at its helm.

Accelerated global expansion
If that's still a little too fluffy for you, Potdevin also raised investors' eyebrows with this: "2014 is an investment year with an emphasis on strengthening our foundation, reigniting our product engine, and accelerating sustainable and controlled global expansion."

But that accelerated expansion won't come just yet. Rather, it'll use 2014 to lay the groundwork for future growth.

After adding 43 locations in 2013, Lululemon ended the fiscal year with 254 total locations. For 2014, it is targeting openings of 42 new corporate-owned stores this fiscal year, including locations in Austrailia and the U.K. and up to 10 new kid-centric ivivva athletica stores. 

On the subsequent conference call, Potdevin also reiterated plans to build Lululemon into a "global brand for both men and women" -- a nod to what I recently described as their single biggest challenge over the long run. In fact, while Lululemon is still planning its first stand-alone men's store for 2016, three of this year's new locations will feature a significantly larger overall footprint with an expanded men's section.

Finally, CFO John Curry confirmed that the company expects comparable-store sales to gradually improve as 2014 progresses. This will come from a combination of ongoing supply chain investments and, simply put, the string of challenges Lululemon faced in 2013.

Good things come to those who wait
In the end, all of this was more than enough for the market to forgive Lululemon's light guidance and bid up its shares. For patient investors willing to wait for its long-term expansion plans to come to fruition, I think the best gains are yet to come.

Steve Symington owns shares of Lululemon Athletica and Under Armour. The Motley Fool recommends Lululemon Athletica. It recommends and owns shares of Under Armour. 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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