NEW YORK (TheStreet) -- When a company under-delivers or over-delivers on its quarterly earnings relative to Wall Street's expectations, it's vital to determine whether the performance was fundamentally driven.
When it comes to yoga apparel maker Lululemon (LULU), the company's business model of selling premium apparel inside of relatively small square footage retail stores is flawed. Such a model worked great in Lululemon's infancy since it was basically the sole specialty apparel retailer selling yoga-themed gear in malls. However, with financial success came a competitive onslaught that prior management didn't properly anticipate, and new management may not fully appreciate.
The market Lululemon competes in (yoga/women's athletic apparel) hasn't died and, in fact, remains one of the hottest in the physical mall and online. But new entrants have blurred the line between yoga gear and athletic apparel. Lululemon was able to fetch exorbitant prices for its swag early its lifecycle as women's performance apparel lines from the likes of Nike (NKE), Under Armour (UA), Adidas, and even Macy's (M) private level brands had long been afterthoughts. To consumers, Lululemon was offering a badly needed, high quality option for people striving to live healthier and active lifestyles. Price points mattered little.
Given the increased number of offerings from major companies with stronger supply chains than Lululemon, products from the yoga-apparel market have been lumped in with the athletic wear category in the minds of consumers. In other words, the technical details built into Lululemon's merchandise are being drowned out by cheaper, eye-catching alternatives.