Here's a lovely idea: everyone doing their best by doing their best. That's a vague summary of the ideal that backs socially responsible investing. Investors are looking for businesses that are both good companies and good members of the community. One of the most prominent names in the retail world has been lululemon athletica (NASDAQ:LULU), which has grown to prominence through its connection with local yoga businesses and focus on quality.
Investors looking for socially responsible companies should still be happy with the social side of Lululemon's operation, but the business side might need work. Here's a look at what Lululmon is doing to make the world better and where it needs to work harder to make itself better.
The Lululemon social commitment
There are three big business segments in which socially responsible investors want to see the right moves from companies: production, distribution, and investment. For Lululemon, production happens abroad. The company produces its luon fabric in Taiwan and its products are made in a number of countries. Lululemon has not signed any of the major supply chain agreements that have been issued since more than 1,000 people died last year in the collapse of a commercial building in Bangladesh, but instead has promoted its own vendor code of ethics. That code states that "vendors are expected to uphold legal, humane and ethical standards of production, while also caring for the environment."
As for distribution, Lululemon is known for building relationships with yoga studios and running introductory classes in its own stores. Those community-building efforts include providing lower-cost products to yoga studios and selling clothing through the studios before opening corporate stores.
Beyond production and sales, Lululemon provides funds to its store in order to support local organizations and efforts. The company's Metta project has contributed to literacy efforts in Cambodia, flood relief in Canada, and kids' healthcare programs in Atlanta.
The financials at Lululemon
With its socially responsible credentials established, we need to look at whether Lululemon is also a good company. Lululemon has been wracked by bad news over the last two years, including product failures, management changes, and apologies for PR failures. That has hit the business hard, and the stock has suffered on the back of that weakness.
Looking at the first six months of this fiscal year, Lululemon has increased its total sales by 12%, but earnings have been hammered by promotions and falling margins. Diluted earnings per share for the first six months fell from $0.71 last year to $0.46 in 2014 -- although the company did take a $0.22 per share hit due to a tax adjustment.
In short, things look bad for Lululemon this year. That doesn't mean the company is a bad investment, though. Over the next five years, Lululemon will be able to distance itself from its former problems, if all goes according to plan. If that's the case, we need to look at what the company has going for it over the long run.
With a strong community, good brand recognition, and a product that just keeps getting more popular, Lululemon has potential. The biggest hurdle right now is competition, as traditional retailers jump into the yoga wear and studio wear space that Lululemon used to dominate. With no switching costs associated with moving to other brands, Lululemon needs to move quickly if it's going to get back on top.
I think things may have gone too far for it to fully recover, but CEO Laurent Potdevin has a background in socially responsible business, coming over from TOMS shoes. That might help the company get back to its roots and give socially responsible investors something to cheer about.
Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. 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.