NEW YORK (TheStreet) -- Everything has gone haywire for Lululemon Athletica (LULU) over the past six months as shares of women's apparel company lost 27%.
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.
Six months after the recall, CEO Christine Day was succeeded in December by Laurent Potdevin, which 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 continues to have some problems. Gross profit has dropped and is now 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 execute the necessary actions needed for growth. For instance, it has been able to grow its e-commerce business, which has in turn created for demand for its product and much 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.
These are some reasons why I believe Lululemon is poised for future growth.
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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
Stock quotes in this article: LULU, NKE, UA, COH, KORS
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