Reuters

(Reuters)

Lululemon Customers Say Selection at Core of Sales Turnaround

Features Reuters

When retailer Lululemon Athletica pulled its "Define Jacket" off the shelves in 2013, customers were dismayed. When it embarrassingly recalled its signature yoga pants for being too sheer, they rushed for the exits.

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Now the jacket is back, and so are customers, and that has helped boost Lululemon's shares more than 70 percent from their low last June.

In January, the company forecast an increase in same-store sales that was roughly double analysts' expectations, suggesting that the nearly two years of work it took to fix the supply-chain and other problems that had led to the "pantsgate" recall are paying off.

Some Wall Street brokers have turned negative on the stock ahead of Lululemon's next earnings report on March 26, but many longtime shoppers have regained enthusiasm.

They say a wider selection of styles, colors and prints are at the core of the revival overseen by Lululemon's new chief executive, Laurent Potdevin, who started in January 2014 after serving as president of TOMS Shoes.

Fashion bloggers say there was a two-year dry spell during which selection and variety were limited. Now they often update their blogs with new products and styles several times a day.

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"The sheer amount of products and options that Lululemon now produces is staggering," said Suzanne Lane, a Lululemon fan who started her Agent Athletica blog less than a year ago.

HUNGER, NOT STARVATION

Potdevin, who was hired for his experience in supply-chain systems, said that making product and quality a "clear area of focus" was his aim when he joined Lululemon.

"We've got a very loyal guest and she's coming back and she's coming back more often," he said on a call in December.

Some shoppers say they have experienced a "180 degree" change in service, including a looser return policy. Stores now take phone orders, ship for free, and also hold products in-store for customers.

Lululemon has also tweaked its practice of making only limited qualities of an item available to spur demand and minimize inventory. Now, Potdevin said, "while we don't mind our guests being hungry for our product, we don't want them to starve for it."

QUESTIONS LINGER

The investment community says Potdevin deserves praise for leading a team that has markedly improved selection and service.

"Can he get the culture back to where it was? (That) remains to be seen, but he's certainly making great strides," said Roger Hardy, chairman of Hardy Capital Partners, a longtime shareholder.

Others fear Lululemon is still at risk from growing competition. Goldman Sachs downgraded the stock to "sell" this month, citing pressure from Under Armour, Gap's Athleta, among others.

"We need to have confidence that the turnaround is going to continue and accelerate," said Tim Ghriskey, chief investment officer at Solaris Asset Management, which has exited its Lululemon position.

Some also worry about valuation. The stock trades at a higher price-earnings ratio, 30.6 times forward earnings, than many of its peers.

That is well off its 2007 peak of around 90, shortly after the company went public. The historical median is 32.3.

NO SHADOW

Unlike previous CEOs, Potdevin will not have to operate in the shadow of founder Chip Wilson, who quit the board recently after years of disputes. Last June, he attacked fellow board members for being too focused on short-term results.

Two sources familiar with the matter said the split was exacerbated when the board on three occasions turned down a clothing fabric created by Wilson's wife. That fabric has since become the base material at the Wilson family's new clothing retailer, Kit and Ace.

The sources, who are not authorized to publicly discuss the matter, said tensions came to a head in December, when Wilson was the only board member excluded from a subcommittee meeting. They said the board was informed of his resignation only minutes before Wilson's departure.

Lululemon declined to comment.

Wilson said fabric was an issue, but he declined to discuss the specifics of his departure and said he is happy with Lululemon's revival.

"I'm very pleased with the results so far," Wilson said in an email. "As a shareholder I will continue to do what I can to make sure the company continues to get back to where it was."

(By Solarina Ho and Euan Rocha; Editing by Jeffrey Hodgson; and Peter Galloway)