Lululemon gets back to its roots to win back customers after recent missteps

Lululemon Athletica Inc. (Nasdaq:LULU) says it plans to get back to “what it does best” by creating great products and engaging customers as it seeks to win back their love and put last year’s missteps behind it.

“We’ve reflected on last year and we’ve learned from last year and we’ve done that with humility,” chief executive Laurent Potdevin said during his first earnings call since taking over from Christine Day in January.

“You go back to our mission, which is elevating the world to greatness, and I think that to do that well we need to be inclusive. This past year we’ve stumbled a couple of times and we’ve had to be defensive, but we’re very proud of what we do.”

The Vancouver-based company, which reported a fourth-quarter profit of $109.7 million on Thursday, roughly in line with a year ago, has had to grapple with the fallout of several setbacks over the past year, including its handling of a problem with its black Luon pants, the fabric of which was sometimes see-through.

Even after the company moved to fix the problem, new complaints emerged about the quality and durability of the pricey workout gear.

Founder Chip Wilson triggered a backlash in November after suggesting on Bloomberg TV that Lululemon’s yoga pants didn’t fit well on some women. He later posted a video message online taking responsibility “for all that has occurred.”

Wilson is expected to step aside as executive chairman ahead of the company’s annual meeting later this year, but will remain a director of the company.

On Thursday, Potdevin said it was time for the company to move forward, starting with rebuilding its relationship with customers by empowering staff to “get back on their feet and speak about the brand and product … with confidence, humility, (and) really with the mindset of making our guests thrive, listening to them and being inclusive.”

Potdevin also emphasized a focus on technical innovation, function and style to get back to making the clothes that made people flock to the company in the first place.

“Unlike a few years ago, we are not the only game in town,” Potdevin said. “And while we created this category and continue to lead it, we understand that our guests have choice. Loyalty is a priority.”

RBC Capital Markets analyst Howard Tubin said he was encouraged by the fact that the new leadership at Lululemomn “remains committed to growing the brand’s presence while maintaining high product innovation.”

Faye Landes, an analyst with Cowen and Co., said markets now had “more insight into what LULU meant when they said that incoming CEO Potdevin is a good cultural fit.”

“Not many executives we know are capable of the following quote: ‘we are reflecting on our learnings with humility’,” she said in a note to clients.

The company, which is known for its yoga wear, reported a profit of $109.7 million in the 13 weeks ended Feb. 2, compared with a profit of $109.4 million in the same period a year earlier, which included an additional week.

Revenue increased seven per cent to $521 million from $485.5 million.

Earnings per share were steady at 75 cents, beating analyst expectations of its revised guidance by three cents, according to data compiled by Thomson Reuters.

For the year, the company earned $279.5 million or $1.91 per share, compared with $270.6 million or $1.85 per share for 2012. Revenue for the year increased to $1.6 billion from $1.4 billion in 2012.

Its immediate sales outlook, however, was flat, while guidance for the first quarter and for 2014 was lower than analysts had expected.

Lululemon said it expected net revenue to be in the range of $377 million to $382 million for the first quarter of 2014, based on flat total combined comparable sales. Earnings per share are expected to be in the range of 31 to 33 cents.

For the 2014 financial year, the company said it expects net revenue to be in the range of $1.77 billion to $1.82 billion based, while diluted earnings per share are expected to be in the range of $1.80 to $1.90 for the full year.

Lululemon also said margins will be impacted by plans for “controlled” expansion in Europe and Asia and Europe. It’s opening its first store in London next week.

Shares of the company were up US$3.27 or almost seven per cent to US$51.50 on the Nasdaq on Thursday afternoon.

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