Lululemon's problems began back in 2013 from a combination of a shortage of spandex and an embarrassing recall of its black luon yoga pants after a transparency issue caused them to be pulled from stores. The chairman, CEO and other top executives subsequently resigned.
Shares have yet to fully recover, down nearly 13% for the year to date, as of Friday's close of $51.39. The Standard & Poor's 500, by contrast, is down 12%.
Six months after the recall, CEO Christine Day was succeeded in December 2013 by Laurent Potdevin. The news sent shares down about 15%. Potdevin is a former director of North America operations for Louis Vuitton in South America and CEO of Burton snowboards. Yet, shareholders had expected more from Potdevin even though he is has plenty of experience on clothing lines geared toward men.
Luluelemon's problems include gross profit, which dropped below what it was in 2012. The company also issued fairly low guidance, telling investors to expect flat same-store sales for the current quarter. Revenue did jump 21% to $345.8 million in the last quarter.
Lululemon relies on trends to capture market share as well as offering quality clothing, which is why the recall struck a nerve. Lululemon hasn't faced major competition in women's fitness clothing but that is slowly changing.
Lululemon has said its strong cash flow, solid balance sheet and liquidity will allow it to execute the necessary actions needed for growth. For instance, it has been able to grow its e-commerce business, which in turn created demand for its products and more brand awareness. Net revenue from the company's direct to consumer channel increased 39% and represented 15.5% of total revenue.
Margins are a big factor. Lululemon's profitability and sales may decrease as a result of escalating product costs and diminishing selling prices. Seasonality is another factor: Lululemon generated approximately 35%, 37% and 36% of its full year gross profits during the fourth quarters of 2012, 2011 and 2010, respectively.
I think Lululemon has tons of potential for upside as it recovers from 2013's problems. Lululemon's margins are now very strong and will continue to be so for the long term. It is expanding internationally. It has gained brand-name recognition.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.