Between the beginning of 2009 and the end of 2012, Lululemon (NASDAQ:LULU) exploded as its stock skyrocketed over 1800% during this four-year period. However, after falling over 20% in 2013, its stock has accelerated downward and already dropped 32% year-to-date.

Lululemon's 2013 sheer yoga pants snafu commonly receives the blame for its downfall. Another answer is the growing competition from other companies trying to catch some of yoga's growing popularity like Under Armour (NYSE:UAA) and Gap (NYSE:GPS).  

While 2013's merchandise problems and competition threats have been key issues for Lululemon, they don't necessarily paint the entire picture of why Lululemon continues to underperform.

So what really happened to Lululemon?

Credit: Pixabay and Lululemon

Lululemon's recent earnings and company's 2014 outlook
During the first quarter of Lululemon's fiscal 2014, its revenue was up 11.2% to $384.6 million. However, because it plans to repatriate $30.9 million in foreign earnings and use it for an upcoming share buyback program of as much as $450 million over the next two years, its net income fell to just $19.0 million, down from $47.3 million in the same quarter a year ago.

Total same-store sales grew just 1% for Lululemon during the quarter. Even with a 25% gain in online sales, bricks & mortar locations saw sales fall 4%. The stock took a sharp hit after earnings, though, as management reduced its outlook and forecast that same-store sales would decrease for the year.

In contrast, Under Armour saw its revenue climb 36% to $642 million, while its net income jumped 73% to $13.5 million. The company has been firing on all cylinders during the past year as its No. 1 growth category, apparel, grew another 33% during the quarter.

Under Armour has now experienced 16 straight quarters of total revenue growth above 20% and 18 straight quarters of 20% or more revenue growth in apparel sales.

Gap grew its top line in its first quarter 1% to $3.77 billion. Yet its net income dropped to $260 million, down from $333 million in the same quarter a year ago, due to foreign currency fluctuations. Its overall same-store sales also fell year-over-year at 1% versus 2% growth a year ago. Most recently, in its June sales release Gap saw its revenue inch up another 1% to $1.54 billion, following May's $1.27 billion.

Overall, Lululemon has been the major disappointment among the three companies during the past twelve months, as shown below.

Lululemon's past year performance against Gap, Under Armour, and the S&P 500 Index.  Credit: Nasdaq

What really happened to Lululemon?
Some might say that yoga is just a passing fad, and because of this, Lululemon's future is in jeopardy. This is further supported by the fact that inventory for the company jumped 23.4% last quarter.

However, recent statistics say otherwise. Within the US, an estimated $27 billion is spent annually on yoga products as yoga spending overall increased 87% between 2008 and 2012. The industry is expected to report annual revenue growth of 4.8% through 2017.

What really happened to Lululemon begins with quality control issues that came to a head in 2013 with the yoga pants sheerness debacle. The see-through pants were estimated to cost Lululemon $67 million in sales. Yet we could say that the true cost remains unknown, based on the bad publicity the problem continues to cause.

Nevertheless, multiple suppliers were really the source of the sheerness error. Ten years ago, Lululemon had a single outsourced supplier that it could easily manage and control for quality. Today, it uses multiple suppliers across multiple countries, and making sure that all of them follow the same standards is a logistics nightmare.

The center of Lululemon's 2013 yoga pants controversy. Credit: Lululemon

Competition and new entrants also 'happened' to Lululemon. Under Armour has been able to allocate profits from its other product lines to its focus on yoga-wear.

Gap's Athleta remains the brightest spot in the company's portfolio. Six new Athleta stores opened last quarter, and by the end of this year, there should be a total of 100 in the US. While management has not stated specific same-store sales numbers for Athleta stores, it most recently said that the brand had a very good first quarter.

Under Armour and Gap's Athleta aren't the only threats to Lululemon; dozens of smaller companies have entered the industry as well. The biggest problem for Lululemon, though, is that its competitors often ask less for comparable yoga merchandise.

As a response to increased competition, Lululemon has strayed away from its core competencies. In recent months , the company has launched a new line of casual clothes under the &Go line that includes sundresses, pants, and tank tops while following a strategy similar to that for its yoga line in terms of premium pricing.

Marketing and PR problems continue to plague Lululemon as well. Founder Chip Wilson has a history of saying the wrong things at the worst times. During the sheerness debacle of 2013, he blamed fat women, while in 2004 he offered a controversial answer on his choice for the company's name .

In 2004, he said it was funny to watch Japanese people try to say Lululemon since the 'L' is not in their vocabulary. However, the company's website currently says that it chose its name using a survey of 100 people .

Leadership outside of Chip Wilson has also been a burden on Lululemon and its shareholders recently. In 2013, CEO Christine Day abruptly stepped down. Her replacement, Laurent Potdevin, so far has failed to show shareholders an adequate plan for stabilizing the business. Most recently, CFO John Currie said he plans to retire by the end of this fiscal year.

Lastly, the lack of patents or exclusive intellectual property may be the biggest dagger in Lululemon's future. Within its SEC filings , Lululemon addresses this problem by stating that due to its lack of ownership of the technology that makes up its yoga merchandise, current and future competitors can manufacture and sell products with similar performance characteristics, fabrication techniques, and styling parameters.

The lack of patents means that competitors like Gap can create nearly identical yoga pants and sell them for less money. Credit: Gap

Bottom line
In a horse race, the one on the inside track usually wins in the end. However, in business, being on the inside doesn't guarantee long-term victory. Lululemon didn't succeed by selling just yoga pants--tt largely succeeded because it also sold an image and a lifestyle.

However, when you add 2013's problem to the way that leadership has dealt with customers and the rising competition since then, Lululemon has hurt that image. As a result, customers who might have chosen the competition just because of lower prices now have a lot more reasons.