UPDATE 1-Lululemon to polish tarnished image after "wake-up call"

Tue Jan 14, 2014 5:17pm EST

By Solarina Ho

TORONTO Jan 14 (Reuters) - After a year of bungled public relations and messy quality and supply-chain troubles, Lululemon Athletica Inc is committed to fixing the problems that have marred its trendy image, a top executive at the yogawear retailer said on Tuesday.

Chief Financial Officer John Currie made the comments a day after the Vancouver, British Columbia-based company issued its second earnings warning in just over a month, sending its stock to a two-year low.

"2013, that's a year that we're quite happy to see going behind us ... the quality problems that we had earlier in the year were a real wake-up call," Currie told an industry conference.

"You always hear the phrase that any PR is good PR. What we learned is that's not always the case. I just wanted you to hear that we're taking it seriously. Like, we get it."

Lululemon, which had carved out a lucrative niche selling fashionable high-end workout clothes, was forced to recall some of its signature black stretchy yoga pants last March because they were too sheer.

Later in the year it acknowledged sales had been hurt by negative press about the product recall and by comments by founder Chip Wilson, who said Lululemon products "just actually don't work" with some women's body shapes.

Currie's mea culpa on Tuesday came as many investors question whether Lululemon's recent troubles and the increased competition it faces from rival workout gear makers such as Nike Inc and Gap Inc's Athleta brand have sapped its momentum.

The stock, which closed down almost 1 percent at $49.26 on Tuesday, has tumbled about 40 percent from the record high it hit seven months ago.

Lululemon warned on Monday that sales at established stores, a key industry measure, would probably fall in the current quarter. This would be the first year-on-year drop since 2009 and a far cry from the days when same-store sales growth could reach more than 30 percent.

The decline in comparable store sales has been in the "high teens" with Canadian stores faring worse than that, and U.S. stores somewhat better, according to analyst Faye Landes at Cowen and Co, who cited discussions with management.

"Weather is a likely issue, but we still view these results as abysmal," Landes wrote in a client note published on Tuesday, adding that comparable store sales were strong the week before Christmas.

"Lulu pointed to some mix issues, notably insufficient seasonal merchandise, but we're not sure how or when this sort of thing will ever be ironed out."

BRIGHT SPOTS

Currie said the company now conducts extensive and constant testing of all its fabric, starting at the raw material stage at the mill and that it is already seeing benefits from the changes it has implemented.

"We still have some additional hires, some additional investments, but we're well under way," Currie said. "We'll see continued improvement throughout 2014."

Currie said the downward revisions overshadowed bright spots, noting that same-store sales growth of menswear in the fourth quarter was "in the mid-teens" and that same-store sales gains at Ivivva, its apparel business for young girls, was also in the teens.

Lululemon is looking to accelerate Ivivva's growth this year and open its first standalone men's store by 2016.

Currie also noted that if sales at existing stores were combined with its growing e-commerce sales, then same-store sales growth for the quarter would be in the low, single digit range.

For the full year, sales at established stores are expected to grow 3 percent, or 8 percent when combined with online sales.

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