Lululemon Faces Challenges in Turnaround Effort

Eileen Meng Lu |

Lululemon insincere, Lululemon Chip Wilson, Lululemon Yoga Pants,  Under Armour, Nike,

With a low of $2.25 per share on March 2, 2009 to a high of $81.43 a share in June 3, 2013, Lululemon Athletica Inc.’s (LULU) stock traversed quite a large span in just four years. The seven-year-old yoga apparel company has also gone through multiple spikes and plunges as of late, and its stock sank to around $40 on July 7. Under the pressure of slumped sales and unpleasant earnings, is Lululemon Athletica going to hang in there as a leading proprietor workout gear, or will it never come back?  

Lululemon’s Challenges

2013 may have been the most controversial year for Lululemon. In March the company recalled its core product, black yoga pants, because they were too sheer. Lululemon’s founder Chip Wilson’s told Bloomberg TV that some females weren’t quite fit enough and were therefore stretching the fabric too much. Lululemon blamed Eclat Textile Co. for the sheer quality, but Eclat Textile responded that all shipments to Lululemon went through certification process that Lululemon had approved.

While Lululemon recovered somewhat, the insincere “excuse” damaged the company’s reputation. Seventeen percent of its Yoga pants were recalled, at an estimated $67 million cost. Other companies, including Gap (GPS) , Under Armour (UA) , VP Corp (VFC) and Victoria’s Secret ($LB) have also entered the market and eat Lululemon’s market share with similar products at lower prices. 

The negative influence of the scandal lasted into 2014. Lululemon’s Q1 EPS significantly decreased by 60% from the year-ago period. With the disappointing earnings report, shares traded 16% lower on the day.

In general, year to date Lululemon’s stock has been on a steady decline. Even at a lower price, many investors are unsure whether it’s an appropriate time to buy. In terms of P/E ratio, Nike Inc (NKE) has a P/E ratio at 26.9, Adidas at 22.5, and Gap Inc. has a P/E ratio of 16.1. Consider the Lululemon price to earning ratio at 24.1, the company seems not to be the most attractively valued of its peers.   

Lululemon’s Countermeasures

After the infamous recall scandal, in 2014 Chip Wilson left his position as chairman although he retained a seat on the board. In January Laurent Potdevin replaced Christine Day as CEO, and focused on dealing with the supply chain problems, especially its product quality issues. The company vowed to diversity its supply chain then, which can be seen in its top supplier list.

Eclat Textile, the one Lululemon blamed for its product qualities in 2013, was among the Lululemon’s top suppliers in 2012, but didn’t make the 2013 list. Although subsidiaries E-top Co Ltd. was on the 2013 list, coupled with other companies owned 100% by Eclat like Unison (Wuxi) Textile and Garment Inc, Eclat accounted for only 9% of the total metric tons of fabric supplied by the top 20 suppliers.   

To retailers that 100% rely on other manufacturers, keeping a diversity in the supply chain not only keeps the company over-dependent on a certain manufacture, but also empower itself to bargain with suppliers to reach a better price.

Regarding the doubt of its position in the workout apparel retail segment, Lululemon is more likely to stay as a luxury brand as before. Although companies like Gap and Victoria’s Secret started to sell workout clothes, Lululemon continue to be a luxury brand in this field. For example, their “Full-On Luon” leggings sell from $82 to $98 depending on styles, and its substitutes in other brands mostly sell under $50. Lululemon, as the first entry into the market, has attracted a customer base who are less price conscious. The brand stands for a life-style symbol rather than just simply Yoga pants. It has so far done a good job reaching its targeted customers, higher educated and relatively more financial capable women living a healthy lifestyle through yoga and running.

So far the company has over 260 stores worldwide, up from 211 on February 2013, and continues to expand its international presence.

Possible Acquisitions

The ousted former chairman Chip Wilson recently made a case to come back and take over controls again, although his history of making insulting comments might make his return very difficult. Retaining a 28% stake in Lululemon, Wilson hired Goldman Sachs and many consider a proxy fight or to position for a potential buyout of Lululemon.

Credit Suisse Analysts Christian Buss said the possibility of an acquisition was low. He said Lululemon was now losing its focus because of its investment in non-core kids and men clothing, and it’s unclear international markets. Buss said it was possible that Wilson would will sell a part of his shares to an activist investor in exchange for a mutually agreement on agenda. 

Analysts believes possible candidates to acquire Lululemon would include Nike, VP Corp, Adidas and Kering, which are the brand conglomerates with financial capacity to offer multi-billion dollar acquisition, supply chain capacity to speedup product flow, address the quality issues that challenged Lululemon in the recent couple of years, and the ability to expand Lululemon into international markets. 

Whether it will be acquired or not, the current picture is that the company’s stock will remain in a downturn. Although Lululemon has made an effort to keep up in supply chain and expand market, its stock does not expect a big turnaround unless the company can effectively regain customer trust and boost its sales this year.  

 

 

 

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Companies

Symbol Name Price Change % Volume
UA Under Armour Inc. Class A 28.82 1.79 6.62 6,932,595
VFC V.F. Corporation 57.08 -0.31 -0.54 2,665,684
NKE Nike Inc. 51.55 -0.55 -1.06 9,260,340
GPS Gap Inc. (The) 26.48 -0.02 -0.08 8,073,849
LULU lululemon athletica inc. 68.84 9.00 15.04 16,473,998
LB L Brands Inc. 75.12 0.51 0.68 1,471,722
MDV:CA Megastar Development Corp. 0.04 0.00 0.00 0

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