Lululemon: Not Quite H(om)e Yet

What a year it’s been for Lululemon Athletica (LULU). The athletic-apparel and yoga-wear giant made headline after headline–for all the wrong reasons. It’s dealt with negative PR challenges. But that would all be noise if it weren’t for the fact that they’ve has a big impact on Lululemon’s business. So, naturally our burning questions have been: How big an impact and when will those issues go away?

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We got some clues today after Lululemon reported earnings that made us snooze a little at the market open. For the period ended Feb. 2, earnings went sideways at $109.7 million or 75 cents, unchanged from last year's $109.4 million and 75 cents. Revenue rose to $521 million from $485.5 million a year prior. Analysts polled by FactSet had expected earnings of 72 cents a share on revenue of $515 million. Lululemon also said it expects to earn 31 to 33 cents per share in the first quarter, lower than the Wall Street consensus for 38 cents.

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On the conference call, the new CEO Laurent Potdevin said Lululemon has done some soul searching and plans to take steps to become a more inclusive brand.

"We've reflected on last year and we've learned from last year," he said. "We've done that with humility. If you go back to our mission, it's elevating the world to greatness. To do that well, we need to be inclusive."

Still, Lululemon’s shares have jumped 5.5% to $50.90, and left its competitors in the dust. Nike (NKE) has dropped 0.2% to $73.11, Under Armour (UA) has gained 0.7% to $114.42 and the Gap (GPS), whose Athleta brand competes head on with Lululemon, has risen 0.2% to $39.91.

Lululemon’s big gain didn't go unnoticed by one analyst. Brian Sozzi of Belus Capital Advisors writes:

Lululemon shares have popped in response. I would be hesitant to warp into a #LuluBull at the drop of a dime given the clear challenges facing the brand. The stock has acted favorably for a few reasons:

1.       Fourth-quarter 2013 same-store sales came in at the better part of the company's lowered guidance (-1% to -5%; actually -2%).

2.       First-quarter 2014 flat comp guidance implies quarter to date traction is being made in regaining customers, in spite of continued harsh weather impacting mall traffic.

Analyst Sam Poser of Sterne, Agee & Leach pointed to Lululemon’s low to mid-single digit same-store sales guidance to justify maintaining an Underperform rating. And Poser is still worried about the impact of the bad press on the Lululemon:

Product and supply chain issues will be resolved, but the value of Lululemon products come from the combination of great product and great in store experience. That combination has been damaged. Hence customers are looking to other brands that may offer a better value proposition.

Here's to hoping their lost customer base can meet Lululemon where they are in the future.