When Life Gives You Lemons, Don't Buy Lululemon

| About: Lululemon Athletica (LULU)


Lulelemon athletica has seen compound annual growth rate of 40% from FY2009 to FY2013.

However, from last year, the stock price has dropped over 45%.

The company's growth is beginning to slow - no longer making the company a strong investment.

Lululemon Athletica inc. (NASDAQ:LULU) is a designer and retailer of athletic apparel designed for an active lifestyle of yoga, running, and other general fitness activities. The company operates primarily in North America and Australia. Once upon a time, lululemon had a very unique, and profitable, position in the athletic clothing market. The company's revenues increased at a compound annual growth rate of 40% from $353.5 million in FY2009 to $1,370.4 million in FY2013. Now however, the company is slowly beginning to lose its place and is facing declining sales and stock prices. From early August last year, the stock price has dropped 46.25%. I attribute this large decrease to three major factors:

1. Tarnished Brand Image

In 2013, lululemon was forced to recall 17% of the company's yoga pants because they were see-through. The company's dependence on third-party suppliers and manufacturers outside the US gives the company little control over the quality of products. The company has no long term contracts with its suppliers or manufacturers, which jeopardizes maintenance of high manufacturing standards.

If the recall wasn't a big enough blow to the credibility of the brand, the founder of the company, Chip Wilson, went on to blame women's bodies. He claimed that the defect was caused by the rubbing together of thighs and that, "Quite frankly, some women's bodies just actually don't work." Beyond the insensitive comments regarding women's weight, Wilson has voiced several other beliefs including: favoring child labor, the humor of the Japanese trying to speak English, and his opinion that The Pill created a generation of divorce.

The argument that some people are able to separate the views of executives from their personal view of the brand itself is a valid one - look at Chik-fil-A for example. However, the majority of lululemon customers are not those people. Many of lululemon's customers characterize themselves as, "strong women," and view lululemon's brand as tarnished now. The combination of the decrease in perceived quality of the clothing and disdain with the founder's views have made a lasting impact on the brand name.

2. Moving Out Wilson

Yes, Wilson has made a slew of controversial comments. Yes, I think he should not have done so. But no, I do not believe that he should be phased out of the company. Not only has Wilson been replaced as CEO, but last week, it was announced that Wilson is selling half of his current stake in the company to private equity firm Advent International. Despite the controversy Wilson has caused, I do not think diluting his influence is going to save the company. His unique vision is what built the company in the first place. He found an underserved sector of the market, and capitalized on it. His comments have caused irreversible damage to the brand, but the company needs him to survive. The company should look to the history of Apple's (NASDAQ: AAPL) struggle with Steve Jobs. Apple forced the founder of the company out after continued "out of control" behavior. However, without the vision that Jobs brought to the company, Apple struggled and eventually, brought him back. Without Wilson's vision, I anticipate a similar fate with lululemon.

3. Competition

Lululemon successfully carved out their own niche in the athletic clothing market. However, as with most successful innovations, competitors took notice and are beginning to encroach on the space as well. Companies such as GAP (NYSE:GPS), Target (NYSE:TGT), and Victoria's Secret have followed with fashionable entries into the market. The key differentiator is that these retailers are selling at a lower price point. With the fitness market growing so large in the United States, we can expect to see competitors to continue encroaching on lululemon.

Things are not looking bright for the future of lululemon. Even the founder has expressed concern for the board that he describes as, "heavily weighted towards short-term results at the expense of product, culture and brand and longer-term corporate goals." There was a time when lululemon was a leader in the women's athletic market. However, I foresee them losing their place due to a tarnished brand image, loss of the vision from the founder, and intense competition.

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