There's a saying about juggling eggs and how they break, and maybe there's also something about yolks in there. Or if there isn't a saying, there should be one. After a U.S. District Court threw out charges leveled against lululemon athletica (NASDAQ:LULU), the company ended up with fewer eggs to worry about. A group of shareholders had accused the company of failing to properly maintain its products' standards and doing so knowingly.
In a rare display of legal common sense, Judge Katherine Forrest ruled, "It is only reasonable to assume that if Lululemon secretly knew that the (alleged) fix for its quality issues was simply to employ more people to wear its yoga pants and exercise, it would have done so -- rather than the alternative of losing $2 billion in market capitalization."
The many eggs of Lululemon
In July last year, a shareholder filed a lawsuit claiming that Lululemon and the company's senior leadership purposefully hid defects from customers after switching to low-cost production methods and materials. The contention was that the company pulled back production costs in order to sell its products more cheaply, thereby preserving its market share.
The kerfuffle -- origins in an old Scottish word -- traces its roots back to the sheerness issues that Lululemon experienced in early 2013. It turns out that the fabric in some of its yoga pants became sheer when stretched. That's bad news.
Since the beginning of 2013, Lululemon has been fighting fires and losing market share to bigger competitors like Under Armour (NYSE:UAA) who've swooped in to make a name for themselves in women's workout wear.
In the grand scheme of things, the end of a small legal battle is just a small blip on the Lululemon radar. The company's real challenge is to reconvince its customers that there's a reason they should be paying top dollar for Lululemon clothing, as opposed to jumping ship to Under Armour's cheaper women's line.
Fighting the good fight
In its last quarter, Lululemon's comparable-store sales fell by 2%, and the company forecast a small single-digit increase for fiscal 2014. Over the last fiscal year, a smattering of weak quarters led to a 16% increase in overall revenue. Meanwhile, Under Armour put up a 27% increase in revenue for the year. On Under Armour's earnings call, CEO Kevin Plank highlighedt the success in women's wear and said the company was "bullish" on its products going into 2014.
Lululemon's challenge is to find a way back into the hearts and minds of its customers. While the business isn't there yet, I would argue that the addition of Laurent Potdevin in the CEO role is going to be a huge boost for the brand.
Founded by engaging but good-manners-challenged Chip Wilson, Lululemon thrived for a time under former CEO Christine Day. But Day was never a huge community engager, preferring to focus on the business side of the company. Potdevin, by contrast, comes to the company from TOMS, which is almost nothing but community driven. His presence at Lululemon should be a strong first step toward the company solving its bigger issues.
Getting this lawsuit out the way is still good news in that it allows the issue to truly be put to rest, but it's a small step. Potdevin and Lululemon are staring down intense competition for women's sporting dollars from Under Armour, and the company's biggest asset -- its community vibe -- needs a lot of work. I remain hopeful that things can get turned around, but it's not an overnight operation.
Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica. It recommends and owns shares of Under Armour. 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.