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Why Lululemon Athletica’s Stock Took A Dive

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Dec. 18 2014, Updated 8:37 a.m. ET

2013 product recall

Lululemon Athletica (LULU) has been somewhat in transition in 2013 and 2014. It’s seeing operational and high-level management changes. In March 2013, the company was forced to recall its black Luon pants due to the fabric being too sheer. This resulted in lower sales and surplus inventory and millions of dollars of losses to the company. Bottoms are a best-selling product category. The issue affected about 17% of all bottoms stocked for women.

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Recent management changes

Within a month of the recall, chief product officer Sheree Waterson resigned. The company appointed a newchief product officer, Tara Poseley, in October 2013 to oversee the company’s global merchandising and design strategy.

In January 2014, the company appointed a new CEO, Laurent Potdevin, to replace Christine Day, who was retiring. She’d held the post since 2008. In another high-level exit, Lululemon’s chief financial officer (or CFO), John Currie, announced that he was retiring at the end of fiscal 2015. The company has yet to announce his replacement.

In a recent development, the company announced that Duke Stump has been appointed to its senior leadership team as executive vice-president, Community and Brand, effective December 1, 2014.

Founder steps down

Company founder Chip Wilson stepped down from his role as non-executive chairman in May 2014. At the company’s annual general meeting in June, he voiced concerns about how the company was run and its strategic direction. Market rumors abounded that he may have been considering taking the company private. In August, the company announced that ~50% of Wilson’s stake or 13.85% of the company’s outstanding shares, would be acquired by private equity player Advent International. The deal had the board’s approval.

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Stock price movements

Lululemon’s stock price took a dive since the product recall in March 2013, falling by 11.6% between March 14 and April 1. It reached an all-time high of $82.28 the day of the company’s annual general meeting on June 10, 2014. Between June 10 and year-end 2013, it slumped by over 28%, to $59.03 on December 31.

Besides the product recall, the company had also missed shifts in key trends such as consumer preferences for prints as opposed to more basic colors.

LULU’s down 10.3% year-to-date in 2014 as of December 12. This compares to an increase of 4.7% in the SPDR Consumer Discretionary Select Sector ETF (XLY). ETFs tracking popular equity indices the SPDR S&P 500 ETF (SPY), the SPDR Dow Jones Industrial Average ETF (DIA), and the PowerShares QQQ (QQQ) are up by 8.8%, 4.6%, and 16.7%, respectively, in 2014.

Despite being down for the year on a net basis, the stock had reacted positively, rising by 9.1% after the company released its 3Q15 earnings on December 11. We’ll discuss recent improvements in the company’s results and outlook in the next part of this series.

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