My stock world is divided roughly into three parts -- growth businesses, slow and steady dividend payers, and "other," which is mainly root beer brewers, dog breeders, and GE. For a long time, I've had lululemon athletica jammed right there in the growth category. The company had massively high comparable-sales growth coupled with high margins. The brand is synonymous with middle-class yoga, and you can't turn a corner in the summer without running into someone wearing a pair of Lululemon pants.
But then something happened. In March this year, the company announced a problem with some of its material and recalled a metric ton of apparel. That created a knock-on effect that resulted in shortages through the middle of the year. Then the company's chief product officer stepped down. Finally, CEO Christine Day announced that she was stepping down as soon as a replacement was found.
As a reflection of the market's sentiment, the stock is down 7% year to date and it trails the S&P 500 by 30 percentage points. This time last year, the situations were reversed and Lululemon had outpaced the S&P 500 by more than 30 percentage points. What happened?
Source: lululemon athletica.
The heart of the issue is the company's luon -- that's its stretchy fabric that had sheerness issues this year -- product. It was easy to misread the impact of the luon shortage earlier this year as being purely customer-driven. The thought was that the problem would lead customers to question Lululemon's quality, thereby driving sales down.
That doesn't seem to be the exact problem, though. While the company's operating margin did fall slightly between 2012 and 2013, it's not a big enough drop to indicate that Lululemon has had any trouble charging a premium for its clothing. Gross margin is still up in the 50s, which is healthy by any measure.
I think the real problem is that people got used to Lululemon being out of stock, and that's led to a drop in foot traffic. Comparable sales in the first two quarters of fiscal 2013 were up 8%, which is a meaningful hit from the 20% increase it was working with this time last year. The late delivery of luon products caused the company to miss the beginning of the fall selling window, and that's been bad news right on down the line.
To fix things, Lululemon released a new kind of luon, helpfully called "Full-On Luon" -- no sheerness issues here. That's a good step toward getting customers back in the store, but I'm worried that Lululemon is still relying too heavily on a small product set. The fact that one fabric issue can have such a devastating impact on the business clearly has scared investors off. The swath of management changes isn't helping, either.
Alternatives to Lululemon
Other companies have gladly stepped up and taken some of the market from Lululemon over this tumultuous year. Notably, Under Armour and Nike have both increased their studio workout options and have put up excellent numbers for 2013.
Under Armour has said that its studio line is one of its main drivers of sales growth for its women's line. The company had already picked up some momentum with its Armour Bra, and now it's expanding on that while taking a bite out of Lululemon's bottom line. The fact that Under Armour carries a wider array of products means that less is dependent on success or availability of any one line.
For even greater diversity, Nike has been blowing the doors off this year across the globe. Quarterly earnings per share were up 37% over last year, in the most recent quarter. In the U.S., the company has made a push for more income from women, building a community platform to help women engage with each other and the brand. That's going to be rolled out into stores soon, and is going to make Nike's new Legend Pants a serious competitor for Lululemon.
For investors, both Under Armour and Nike look like better, more stable options than the once fast-growing Lululemon. While I think Lululemon still has good days ahead, I'm not sure that its best days aren't behind it. The weakness that it's experienced this year means that I'm moving it out of the growth category and right into "other," where it can rub up with Barq's and talk about the good old days.
Going for global growth
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The article Lululemon Stock Looks Like a Dud in 2013 originally appeared on Fool.com.Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica. It recommends and owns shares of Nike, and Under Armour. It also owns shares of General Electric. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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