Why Lululemon Can Survive a CEO Exit

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Lululemon (NASDAQ: LULU) may have solved its pants problems, but now the company's losing its CEO. When the yoga clothing seller reported its results for the first quarter of 2013, it also announced that Christine Day planned to leave the company. This CEO will leave a strong niche retailer behind, though. Lululemon still retains strengths in management, margins, individual store performance, and overall market positioning. 

Management

Lululemon investors definitely didn't like Christine Day's announcement. The yoga retailer's shares dropped 17.5% on June 11. This CEO helped Starbucks grow in its early years, which gave her credibility with investors. Marina Strauss, at the Globe and Mail, reported that Christine Day was actually the third employee Howard Schultz hired. Lululemon uses a management strategy that makes it less dependent on top level leadership than other clothing stores, though. 

Lululemon has historically given its store managers control over many local business decisions. Laura Bogomolny, at Canadian Business, reported that back in 2006, Lululemon gave store managers the cash to run their own marketing campaigns and didn't use mass media advertising. The Globe and Mail article also explained that Lululemon founder Chip Wilson specifically hired Christine Day because she didn't employ an authoritarian management style. Lululemon's managers have a track record of making good decisions without strict upper management control, and Chip Wilson may recruit another CEO who believes in decentralized management. 

Margins

Lululemon's margins still surpass its peers. Even the $17.5 million inventory write off this quarter didn't eliminate the yoga retailer's margin advantage. Lululemon reported a gross margin of 49.4% and an operating margin of 19.1% for the first quarter of 2013. Under Armour (NYSE: UA) had a 45.9% gross margin and a 2.9% operating margin for the first quarter of 2013. Under Armour currently looks very growth focused though, so its operating margin could dramatically improve in the future. Gap (NYSE: GPS)had a 41.4% gross margin and a 14.2% operating margin for the first quarter of 2013. The Gap's a more mature company, but yoga clothes could still help this retailer's margins improve.

Lululemon's marketing and design strategies help explain its high margins. This yoga retailer offers tight fitting, well designed clothing that makes its customers look more attractive. Lululemon branded products serve as status symbols instead of simply serving as exercise clothing. The company gives clothing to local yoga instructors and puts its staff through yoga classes and other training to strengthen its niche brand even further. Lululemon could maintain these strategies under a new CEO.

Stores

Lululemon's achieved impressive results with a relatively small number of stores. With 218 stores, the yoga retailer posted revenue of $346 million for the first quarter of 2013, with direct sales providing $54 million worth of revenue. Lululemon needs both shoppers who practice yoga and shoppers who can afford its clothing near its store locations, which could limit its available markets. The yoga retailer's addressing this challenge by expanding into multiple countries. Lululemon's based in Vancouver, so it actually entered a foreign market when it added stores in the United States. The company's latest earnings release also mentioned stores in Australia, and a web search shows Lululemon stores in New Zealand as well.

Competition

The departure of Christine Day could create opportunities for Under Armour and Gap, Inc. Gap reported that its Athleta store count rose from 35 to 40 stores in the first quarter of 2013. This number's still less than a fifth of Lululemon's store count, but the expansion suggests that the Athleta concept has gained some traction. Gap also recently announced expansion plans for Paraguay, Hungary, and Mexico. Gap's latest earnings report only listed a North America segment for Athleta, while Asia and Europe segments appeared for the Gap brand and Banana Republic.

A visit to Under Armour's web site showed a variety of yoga pants listed under the StudioLux brand. This sportswear seller may have made additional investments in yoga clothing recently, as well. Under Armour released its earnings for the first quarter of 2013 in April, and CEO Kevin Plank noted that the company saw good results after expanding its Studio line. Under Armour also has an international presence. Countries outside of North America provided $30.7 million of Under Armour's $472 million revenue in the first quarter of 2013.

Takeaway

Lululemon will suffer a significant loss when Christine Day departs, but effective local managers will remain with the business. This yoga clothing seller will also retain competitive advantages that could help its margins bounce back, along with international growth potential. Competitors have made inroads into the yoga wear market, but Lululemon still holds a clear lead in this niche. Lululemon's still a very expensive and volatile stock, but it doesn't look like the end of the road for this company.   

Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can Lululemon fight off larger retailers and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.

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Eric Novinson has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Starbucks, and Under Armour. The Motley Fool owns shares of Starbucks and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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