Is Lululemon Feeling the Lucy Effect?

The weakening of Lululemon’s (LULU) stock yesterday, after a strong start based on what appeared to be blowout numbers, shouldn’t be surprising. The 2 cent per share “beat” wasn’t a beat, after all — at least not after taking into account a lower-than-expected tax rate and about one million fewer shares than the prior quarter, which both added about 2 cents. The strong Canadian dollar also provided a pop. Then there margins, which were lower than expected, and the announced departure in several months of CEO Bob Meers, who is no stranger to readers.

But rather than dwell on the stuff many of you already know — or would prefer to ignore — let’s go straight to Lucy vs. Lulu battle, which has been largely overlooked.

When I track companies, I always want to know who the competition is, especially if it’s private or if it’s owned by a larger company. The non-public companies often make less noise and are often lost and/or forgotten in the hype and noise over a fast-growing, public rival.

A good example is Portland-based Lucy, a direct Lulu competitor that was quietly acquired last year by VF Corp. (VFC) — not known as a shabby operator. According to VF’s 10-K, VF has plans to “significantly expand” the number of Lucy stores, which numbered 60 as of the date of VF’s March annual report.

How important should that be to Lulu investors? I asked one very smart retail watcher, who said that Lucy may be a topic of discussion a year or two from today. “A better question,” he says, “is whether Lulu works in middle-America.” He was referring to the company’s comment that it has had a slower-than-expected ramp in Texas. The company blamed that on having “shortcut” its “winning formula” for opening stores. Or maybe, just maybe, it’s the beginning of the Lucy effect.

Onward.

Comments

[User 172234:]

Hey Herb...give up the bashing and move to a new company. Its redundant. [Edited for abusive content]

2008 Apr 03 08:30 AM

[user12345:]

Herb, never heard of Lucy and I will do some research on it. The reason I bought Lulu stock is that even though at the time it had one store in So Cal my wife, daughters and all their friends knew about it and wanted the gear,my wife for Yoga and my daughter for dance. The store was always packed when I would stop by if I was in the LA area. I did not want to make the same mistake I did with Starbucks which I never bought, where by the way the new CEO at Lulu comes from. Not sure what your issue will be now that Meers is gone but to me this is still a big time growth opportunity

2008 Apr 03 01:28 PM

[Proud mother:]

My daughter went to work at VFC over a year ago. I am proud that she did. I did some research on the company and found that VFC has been in business since 1899. It has weathered many storms over the years and today is prosperous due to it's leadership and that it stays up to date with todays economic needs of todays middle class. I am proud that it is growing in a much needed society of economic stress. There's not many companies left today within that time frame that can boast about it's accomplishemts. Go to VFC website and see for yourself.

2008 Apr 03 03:53 PM

[AWatcher:]

Perhaps, but ignoring financial uncertainties (i.e. outstanding shares and if/when they will appear on the open market), I have noticed something that Lulu generally has that lucy does not; strong brand image. Now, putting aside the seaweed fiasco, lucy may have the heavy backer and perhaps the strong management at the corp holding co; however, this is a demographic that isn't necessarily going to skimp on technical sportwear to save a few bucks. Middle America (which I would not consider Texas as middle America, as can be seen from the heav ad campaigns by Ford, Chevy, Budweiser and other conglomerate brands focusing on Texas' identity as being Texan, and not 'mid-American') may not be an appropriate demographic of this type of technical wear to begin with, . .. and that's okay!

when Victoria secret expanded, it was first present in urban centers, and few doubted it's viability in areas outside of "Mid-America". What it did, in fact, was create a demand for its products. Obvious, lingerie is different from yoga wear, but in the decade of consumption being highly linked not only to image and brand, but to conscious choices, I think your comment should consider how this image conscious corporate "personality' comes into play. Sometimes, it's much easier for the spritely, alebeit eccentric company to develop wings faster than in a large-cap conservatively run organization. Yes, mroe chances to fail, but that has not yet been seen in this case unless the financials fall well beneath expectations, the market is flooded with the remaining shares, and we go well into another dip (and they take out more loans). I'd like to see your analysis on brand considerations on these two more often.

2008 Jun 17 06:38 PM