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What's Next for Lululemon

With competition in the women's athletics market increasing by the day, now isn't the best time for Lululemon to have to go through image rehab.
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Stock prices ticked upward this week for Lululemon. It was a rare occurrence after a six-month period that could be characterized as "drops on drops on drops."

The brand has taken a number of well-documented tumbles this year. A bad production run left its yoga pants transparent. Former CEO Christine Day left the company shortly thereafter. And then Chip Wilson, Lululemon's founder, made some garbled attempts to explain pilling on their yoga pants, and made it sound like some women were just not cut out to wear Lululemon's clothing, lighting another media firestorm.

So Lululemon, which had always been great on technical performance, was suddenly lacking in that area. Wilson's insensitivity soured the company's image of helping women look good while achieving their health goals. The last thing someone hoping to get fit in the new year needs is an athletic company telling her she doesn't belong.

What does the outlook for the once-beloved yoga outfitter look like? If there's one thing that's certain in Lululemon's future, it's that regaining trust is going to take time. But with more and more retailers entering the athletic apparel space, now is not the best time for Lulu to have to play catch-up.

The food doesn't taste as good

Scars don't heal quickly for major companies.

"In a space like this, it's hard to turn things around extremely fast," says David McGoldrick, an analyst at Euromonitor International. "They're not going to come out with their statement in March and immediately become the Wall Street darlings they had been. The issues they've had run too deep, and at the end of the third quarter, they stated that there's weakness in Q4."

It's not about turning things around on a short-term basis, but rather about getting people excited about the brand for the same reasons that they originally had, McGoldrick says. Lululemon made people look good and inspired them to get healthy. The company needs to return to that message.

Lululemon's supply chain is in many ways the easiest part of the problem to fix. Sterne Agee analyst Sam Poser says that the new CEO, Laurent Potdevin, is said to have good instincts about production, an area that Day was lacking in. Day, however, was a great retail mind, and that's one area in which the company has fumbled since her departure.

Poser says that based on visits to Lululemon stores, he has noticed a difference in the quality of service. Slightly less attentive staff sends a subtle but strong message to customers: you can go elsewhere. Poser likens Day's sensitivity to quality in retail as a "Princess and the Pea" situation: She knew innately what was going on in stores.

"It's very, very subtle," Poser says of the current in-store experience. "It's not like it's terrible. It's just not as good as it was."

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Poser compares Lululemon's current relationship with its customers to a beloved restaurant changing up its staff. If you're a regular, the waiters know your order, and you feel a connection to the establishment that goes beyond the food. When that favorite server leaves, so does your special relationship to the staff. Then the food doesn't taste as good.

The problem is that in alienating its customers with the transparent production run and bad press, Lululemon has given its previously rabid fans a reason to look around at other brands.

The competition

It's hard to say which brands the average Lululemon customer might turn to next because the athletic apparel market is so fragmented. Lululemon has been steadily increasing its market share since 2008 but is still well behind Nike and Adidas, the leaders in the sportswear market. Nike led the pack in 2012, with 17.2 percent market share, followed by Adidas (5.7), Under Armour (2.4), Champion (2.2), North Face (2.2) and Lululemon (0.9). But those numbers combine men's and women's sportswear: considering that menswear comprises a substantially smaller proportion of Lululemon shoppers, fifth place is pretty good.

But new entrants are flooding the activewear space, many of which are seeking the attention of the style-minded. H&M recently launched its sportswear, which hits a significantly lower price point and, like the rest of the retailer's offerings, stays decidedly on-trend. Out of the gate, there are scuba tops and prints reminiscent of Peter Pilotto's, in addition to more classic designs.

Kate Hudson recently partnered up with the startup Fabletics, a subscription service that sells full yoga outfits at a roughly $60 to $80 price point. Juicy Couture is in on the workout game, as is Calvin Klein, Victoria's Secret and Nordstrom's Zella brand.

Other, more long-term competitors like Athleta and Stella McCartney for Adidas are likely to get a boost from any weakness at Lululemon, McGoldrick says. And the list of potential competitors won't stop here.

"This whole market is fragmented, and it's still expanding," McGoldrick says. "By no means is the market size complete."

It's not all doom and gloom

In light of Wilson's seemingly fat-shaming comments, the appointment of Laurent Potdevin to the position of CEO in early December should help sentiment. That's not only because Wilson, the bad guy in this situation, is stepping down as chairman, but because Potdevin is coming to the company from Tom's, the feel-good footwear company that donates a pair of shoes to someone in need with every purchase.

"With the new CEO, him coming over from Tom's, a company that has a very strong ethical background and mission, you'd think he'd bring some of that with him and improve their ethical outlook as a company. It's really about moving forward. You can't change what you've done, you continue forward while publicly rehabbing their image."

He also ran Burton, the snowboarding company, so he's no newbie to the athletics space.

Although reports are saying that Lululemon had a poor holiday season, it's not yet clear to what extent that can be attributed to the company and how much it is a product of holiday malaise overall. That should become more apparent when the company issues its next quarterly statement and annual report. Potdevin has his work cut out for him.