Lululemon Must Completely Change Its Way of Thinking in Order to Succeed

Lululemon athletica (LULU 1.43%), the fashionable athletic-wear retailer known for its premium-priced yoga apparel, has been under fire lately. Not only has the company had to cope with customers questioning the company's product quality, it has dealt with public gaffes by founder and former CEO Chip Wilson as well as difficulties in finding a new CEO to replace Christine Day.

However, despite these issues, many of lululemon's customers have remained loyal, and the company appears to have the right leadership with new CEO Laurent Potdevin. Hoping to put its recent issues behind it, lululemon is now trying to get back on the track to long-term growth and convince Wall Street that the company can still deliver. However, in order to generate growth similar to what it once did, lululemon will have to do something extremely difficult -- completely change its way of thinking.

The typical lululemon customer
Right off the bat in lululemon's annual report, the company says exactly who it wants in its stores and exactly pinpoints its target customers. In the introduction section titled "Our Market," the company goes on to describe, truthfully, a very narrow part of the broad consumer market:

Our primary target customer is a sophisticated and educated woman who understands the importance of an active, healthy lifestyle. She is increasingly tasked with the dual responsibilities of career and family and is constantly challenged to balance her work, life and health. We believe she pursues exercise to achieve physical fitness and inner peace.

What is interesting about this is that in an official filing with the United States Securities and Exchange Commission, lululemon addresses targeting the "sophisticated and educated woman" who is looking for inner peace. That being said, the company's astonishing rise has been made possible by these very customers.

Currently, lululemon competes with athletic-wear retailers Gap (GPS -1.28%) and its Athleta brand as well as Nike (NKE -1.26%). As you can see from the table below, lululemon's revenue has grown by leaps and bounds over the past five fiscal years thanks to its loyal fan base, trendy styles, and image. When it comes to yoga apparel and accessories, lululemon is clearly the best place to go, with merchandise that appeals to both men and women.

Fiscal Year Revenue:

Granted, lululemon is much smaller than its larger active-wear rivals, but the company's growth cannot be denied. From FY 2009 to FY 2013, lululemon's revenue grew 251% while Gap's revenue grew just 13.7% even though it operates several popular apparel brands.

Lululemon, which Chip Wilson started as a single store in Vancouver, has been extremely successful by knowing exactly who its customers are -- and catering to them relentlessly. Unfortunately, there may only be so many "sophisticated women" out there who value active lifestyles -- which means that the company's high growth days of catering to this demographic might be over. For this reason, lululemon may need to reevaluate its target market.

Slowing growth
Lululemon now has over 260 stores in operation. While the company does have plans to open more stores in markets like London, England, its days of astronomical growth (such as FY 2010 when revenue climbed 57% over FY 2009) may be a thing of the past. For proof, investors need to look no further than the company's latest quarterly earnings.

For the quarter ended May 4, 2014, revenue increased 11% over the quarter last year to $384.6 million, and same-store sales actually increased just 1%. While this isn't bad for any retailer, the market has and will continue to have high expectations for the premium retailer. Unfortunately, the company is unlikely to meet those expectations unless it can find new markets to focus on.

Trying to change their DNA
Fortunately for investors, the company knows that it has to change the way it thinks. Even though the company comes out in its annual filings and says that its target customers are "sophisticated, educated women focused on an active lifestyle", lululemon has come out with plans to not only continue opening lululemon stores in new international markets such as Europe and Asia, but also to open men's stores by 2016.

The company does have a line of men's clothing within its stores, and while the men's clothing isn't the company's major line of business, lululemon does appear to be trying to change its target market to include men who live active lifestyles along with those customers outside of North America. This strategy will hopefully put lululemon back on the fast track to greater success.

Foolish takeaway
Can lululemon change its way of thinking by moving its focus away from women who are interested in buying premium-priced yoga-wear? Time will tell. Lululemon does appear to be aware that in order to continue to operate as a premium active-wear brand, it needs to begin reaching out to a diversified audience. If lululemon can achieve this goal and begin appealing to not just customers in new international markets, but also a male audience here in North America, it may just turn out to be one of the best retailers a Foolish investor could have in their portfolios.