Lulu And Fitch - One And The Same

| About: Lululemon Athletica (LULU)

Oh, won't you take me home tonight?
Oh, down beside your red fire light
Oh, and you give it all you got
Fat bottomed girls you make the rocking world go round - Queen


Whenever a fad runs its course, the lifecycle always has similarities. First you have early adopters, followed by core purchasers, exuberant demand, then late adopters. As demand peaks, then turns negative, the ride down can be much quicker and is often met with denial, disbelief, and dissent of opinion. Thus is the case with the fashion of yoga pants.

Now, I have purposely differentiated the "product" from the company, Lululemon Athletica (NASDAQ:LULU), because the company is not the fading fad, and investors should be careful not to confuse the two. The products the company manufactures and distributes in its stores are among the highest quality on the market. There are numerous consumers that are brand loyal and willing pay premium prices for their gear. And, while Lulu's yoga pants are a large business line for the company, they do not comprise the totality of its sales.

But, what happens when the fashion trend turns and the company compounds its problems by mounding gaffe atop gaffe? Most likely, sales will drop faster than anticipated, and depending on the damage control implemented by the company, may critically injure the brand for years. However, in the case of Lululemon, this could prove to be either a short-term setback, or a non-issue altogether.

LULU Double Gaffe.

Just last week, founder Chip Wilson appeared on Bloomberg new, interviewed by correspondent Trisha Regan. In response to consumer comments that Lululemon's yoga pants have a quality defect of pilling, Mr. Wilson not only put his foot in his mouth, he swallowed up to his knee before his wife stepped in to give the proverbial Heimlich maneuver.

Speaking about the style and fit of the company's main product line, Wilson said, "Frankly some women's bodies just actually don't work for it." Now, that's just his toes going into his mouth. He followed up saying, "They don't work for some women's bodies. It's really about the rubbing through the thighs, how much pressure is there over a period of time, how much they use it."

To translate, it's not really an issue with the quality of the material or the manufacturing processes of Lululemon's hot pants, it's the thunder thigh fashion queens squeezing into them. And, to back up the translation, visit you local store and notice how the largest sizes (10s and the 12s) are conspicuously separated from the "normal" sizes; relegated to the back of the store.

For the readers that don't like or are offended by the translation, I apologize. But, given the company's history, I stand by the statement, and direct your attention to the statements and handling of this past spring's "see through" leggings episode.

Remember when the news feeds were alive with the sheer bottoms stories, how certain stores were "degrading" or "embarrassing" customers by having them "demonstrate" the sheerness of the yoga pants? Remember how the company tried to sidestep the issue before admitting to quality control failures in manufacturing? No? Perhaps this story will refresh your memory

"But the company insists that the problem is taken care of, and that customers who feel the pants are too sheer are probably just buying them too small," and "Guests don't have the benefit of doing an in-store fit session with one of our educators to make sure the fit is right for them..." Got that? You might think you are a size 6, but you better buy a size 8. And you size 12s... well, better just go look somewhere else; there's nothing here for you.

Shame on me.

More than likely, there are going to be a number of readers who are not even going to make it this far before scrolling down to lambaste me for my piggish, insensitive, whatever attitude. I'm not going to even acknowledge comments such as those, because the above attitude is as offensive to me as it is to anyone else.

You might not like the attitude, I may not like the attitude, and we may never buy any product offered in the company's stores because of the company's perceived position on body size and type, but the harsh truth is, it doesn't matter. We are not the target audience of the company's products. The company has positioned themselves in the market to attract consumers of a very limited demographic. If it ends up offending a large segment of non-customers, it has little to no effect on the company, brand, and ultimately, earnings.

As an example, let us look at another "offensive" (to me) clothing retailer, Abercrombie & Fitch (NYSE:ANF). Back in 2006, CEO Mike Jefferies said, "... we want to market to cool, good-looking people. We don't market to anyone other than that." To clarify further, he said "In every school there are the cool and popular kids, and then there are the not-so-cool kids. Candidly, we go after the cool kids.", and "A lot of people don't belong, and they can't belong. Are we exclusionary? Absolutely." And, that attitude has not changed. Just see this interview with Business Insider from May 2013.

Abercrombie has not gone belly up, nor has it changed its colors. It has targeted its marketing toward a specific demographic, successfully alienated millions of dads (including this one), and yet still has grown sales and revenue since 2010.

Outlook for Lulu.

Earnings estimates for this quarter range between .38 and .43 per share, with Q4 estimates ranging from .77 to .89. That places the company near the front of the pack in the retail industry. They have continued to grow revenue from $450 million in 2010 to an expected $1,625 million this year. Increased competition from the like of Nike (NYSE:NKE) and Under Armour (NYSE:UA) are likely to continue to put pressure on the company's premium ticket prices, and we may see a slip in margins, but brand loyal customers are unlikely to switch.

With respect to the fashion fad throwback to 80s hot pants (Please don't bring back the big hair and skinny ties!); Lululemon is not even in the same class as the discounters like Kohl's (NYSE:KSS) Macy's (NYSE:M) or J.C. Penny's (NYSE:JCP) that have been selling knock off yoga pants. As the trend shifts and the fashionistas chuck their discount black tights in the donation bin at salvation army, Lulu loyalists will continue striding through the door.

In short, the reprehensible position communicated by the founder, and the slipping popularity in Lululemon's mainstay product line should have a short-term effect on stock price and sales, but longer term, neither should have a detrimental effect on the overall health of the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.