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Lululemon Athletica Is a Turnaround That Investors Shouldn't Miss

June 18, 2014 | About:
jaggom

jaggom

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Lululemon Athletica (LULU) is facing troubled times and the stock has declined around 35% since March 2013. It all started with the controversy of see-through yoga pants, and it has been more than a year since it recalled those pants. Yet, there seems to be no relief for the athletic apparel and yoga wear company.

Lululemon has to face tough competition from its peers such as Under Armour and Gap, and with the current issues that Lululemon is facing, it would be very difficult for the company to move forward. However, management has taken various initiatives to turnaround its present situation.

Trying for a turnaround

The company has great expectations from the men’s active wear market. According to Lululemon CEO Laurent Potdevin, “The company is ambitiously looking to tap the men's activewear market.” Although Wall Street expects Lululemon's men's business to be around $200 million, but the company’s anticipations are way ahead than Wall Street and believes that the men's business would be worth $1 billion in the next few years.

The company is also working hard to bring its women’s business on track. It has launched a new clothing line, known as &Go, that can be worn all day long. The company claims that the dress is designed in a way that whether you are in a gym or club, it can be worn anywhere. Lululemon is trying to strengthen its foundation by boosting its product line and is also seeking opportunities for international expansion.

Going forward, Lululemon is anticipating more demand from Asia and Europe. As a result, it has plans to open more stores in Asia, where it already has stores at six locations. There would also be a change in the company’s Asian management, as it is searching for a new manager for its Asian operations. We can expect that with this new change in its top management, development in the region will pick up.

Expansion plans

Lululemon has similar expansion plans in Europe as well, and the company has opened its first store in London. The company has generated a strong buzz around the brand by hosting a Yoga event at the Royal Opera House. The response was fascinating as more than 9,700 people turned up for the event, but there were only 350 spots. This reflects the company's strong marketing activities and brand equity. And with such a fascinating response, the company has decided to open its second store in London by the end of the year.

Lululemon is also working on its product mix with focus on both seasonal and core products. Its new Chief Product Officer is working hard, looking at every aspect of product improvement. The company observed considerable increase in demand for its seasonal products in North America as they are selling at four times the anticipated rate. So, the company can be expected to focus more on this category.

Some concerns

However, there are some serious issues, which the company has to immediately address. One of them is its negative same-store sale performance. In the fourth quarter, the company's same-store sales were down 2%. The company has struggled in this area since the controversy of see through pants, which gave its rivals such as Under Armour and Gap room to eat into Lululemon's market with their own products.

Under Armour has tried to take maximum advantage of Lululemon's blunder last year by promoting its UA Studiolux Quattro collection aggressively. The company currently has a budget of $250 million to spend on advertising. Moreover, it might be possible that Under Armour was able to woo customers away from Lululemon by advertising that its yoga pants never pill. So, Under Armour is a potent threat that Lululemon needs to watch out.

Conclusion

But, all is not lost for Lululemon and management is positive about its future prospects. It sees 2014 as an investment year, and expects to come out strong as a result of its aggressive strategies and improved product mix. Analysts expect its earnings to grow at a compounded annual growth rate of almost 17% for the next five years. Considering these factors, we can assume that the company will bounce back.


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