Skip to comments.Lululemon predicted its own financial ‘downward dog’
Posted on 01/25/2014 8:30:03 AM PST by rickmichaels
Lululemons butt-sculpting yoga pants, with their premium price tags, helped the retailer become one of Canadas hottest stocks in recent years. But the company has stumbled badly. On Jan. 13 Lululemon warned it has seen its store traffic and sales decelerate meaningfully. With that announcement, so too did the stock price. Since last June the chain has shed more than 40 per cent of its market value, giving new meaning to the phrase downward dog.
Now heres the thing. All the troubles that have beset the company were flagged seven years ago. Not by an analyst, mind you, but by Lululemon itself, in documents it filed with regulators when it went public in 2007.
The risk factors section in a companys prospectus (and updated in subsequent annual reports) can be one of the most valuable and overlooked sources of information about a company for investors. While these lists can be dry in tone, theyre a snapshot of everything a companys executives, lawyers and bankers can conceive of going wrong. Its the ultimate in corporate self-doubtHow might we failand its about the only time most companies will ever highlight their shortcomings. Looking back, Lululemon was incredibly prescient. Consider a few of the red flags Lululemon waved back then:
Risk: We rely on third-party suppliers to provide fabrics for and to produce our products, and we have limited control over them and may not be able to obtain quality products on a timely basis or in sufficient quantity.
Result: See-through yoga pants. Last years so-called sheergate scandal saw Lululemon recall many of its popular black Luon pants because they were see-through when stretched. It was a $70-million public relations nightmare Lululemon blamed on a Taiwanese fabric supplier (which denied the charge).
Risk: If we fail to . . . innovate and provide consumers with design features that meet their expectations, we may not be able to generate sufficient consumer interest in our technical athletic apparel to remain competitive.
Result: Dubious health claims about seaweed-infused fabric. Several years ago the company marketed a Vitasea line of products made from seaweed, which it claimed released marine amino acids, minerals and vitamins into the skin. Yet critics said tests found no seaweed in the material at all. The company insists the seaweed is there, but it agreed to ditch all claims of therapeutic benefits.
Risk: Our future success is substantially dependent on the continued service of our senior management.
Result: Upheaval at the top. In 2008, Christine Day took over as CEO, and while there were reports of simmering tensions with founder Chip Wilson, they came to a head after the pants recall. Last summer Day announced she would resign once a new CEO was found. In December the company picked retail veteran Laurent Potdevin as her successorbut not before Wilson trashed the companys reputation even further when he blamed some womens bodies for causing pants to pill. Wilson has since resigned as chairman, but as Lululemon made clear seven years ago in its prospectus, the companys business depends on a strong brand [which may be] tarnished by negative publicity. That wasnt an empty warning.
There are two more important risks the company highlighted that explain the precarious situation Lululemon is in today.
Risk: We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of our market share and a decrease in our net revenue and profitability.
Result: All of that has happened. Rivals like Athleta, a chain operated by the Gap, have capitalized on Lululemons struggles, opening up dozens of new activewear stores and undercutting it on price. And lastly . . .
Risk: Our inability to maintain recent levels of comparable store sales or average sales per square foot could cause our stock price to decline.
Result: Just take a look at the chart on this page. This was perhaps the most important red flag Lululemon could have waved.
The new CEO, Potdevin, will need to perform an almost gravity-defying feat of leadership to turn the retailer around. As the former head of Toms Shoes, famous for donating one pair of shoes for each pair it sells, analysts say hes a good fit for Lululemons corporate culture. But its simply not clear the chains downward trajectory can be reversed.
Investors often accuse companies of hyping their stockof issuing projections that are too rosy, or being overly optimistic about the outlook for their industries. But companies are also required to lay out the risks they face, and they do. Its then up to investors to read and understand them. Those that dont have only themselves to blame.
they will bought by UA or Nike one day.
By golly, the old SWOT Analysis does have some merit.
Our lululemon store in Pittsburgh has a bookshelf behind the cash register upon which sits “The Fountainhed” and “Atlas Shrugged”. I know that has nothing to do with the above article, but I found it interesting nonetheless
Can you still buy them?
I just got back from the mall and I went into the Lululemon store and there were some very attractive clerks in their yoga gear. A lot of firm behinds in tight workout pants. Not to be out done, so were the women in the UA store.
You should have taken pictures. I’m sure they wouldn’t have minded.