CEO Gaffe of the Week: Lululemon Athletica Inc. (LULU)

Last year, I introduced a weekly series called “CEO Gaffe of the Week.” Having come across more than a handful of questionable executive decisions when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top — and with leaders like these on your side, sometimes you don’t need enemies!

This week, we’ll turn our attention to the Lululemon Athletica inc. (NASDAQ:LULU) and its soon-to-be-outgoing CEO, Christine Day.

The dunce cap
To say that actions sportswear is a hot-selling item would be nothing short of an understatement. While most apparel retailers have languished with low single-digit growth as consumers struggle with less take-home income in direct relation to higher taxes, Lululemon and its action-sports peers have soared.

Under Armour Inc (NYSE:UA) and NIKE, Inc. (NYSE:NKE) have been two exceptional beneficiaries of this trend. Under Armour Inc (NYSE:UA)’s first-quarter results, for instance, delivered a 27% jump in footwear sales thanks to innovative new running shoe designs. NIKE, Inc. (NYSE:NKE), best known for its shoes made specifically for active individuals, also saw footwear sales jump by double digits in North America and Western Europe in a challenging third quarter.

Lululemon Athletica inc. (NASDAQ:LULU) delivered similarly impressive results in its latest quarter when it reported a 21% increase in sales to $346 million and a 9% increase in gross profit.

The quarter, though, could have been so much better if quality-control issues didn’t still hang over Lululemon like a gray cloud. In March, some of the company’s most loyal customers began to complain about the company’s flagship Luon black yoga pants after the sheer fabric wound up being too revealing, eventually leading to a product recall. It’s one thing for a company to have a foul-up in its production quality, but the stakes are considerably higher for Lululemon Athletica inc. (NASDAQ:LULU), which requires a pristine public image to sell yoga and exercise apparel that can in many cases go for more than $100 per piece. Consumers won’t pay extra if they don’t feel they’re getting a higher-quality product. They could just as easily make a stop at Target to get something for 10% to 20% of the cost.

In the wake of this product boo-boo, Chief Product Officer Sheree Waterson left the company in April. We also witnessed same-store sales guidance for the second quarter coming in at a sequentially lower growth forecast of just 5% to 7%.

To the corner, Ms. Day…
It might seem a bit unfair to blame Christine Day for the sheer-pants issue when she, as a CEO, has multiple other tasks to worry about in addition to product quality in her stores. However, a CEO is ultimately the person responsible for the success and failure of a company.

Day has done a good job of expanding Lululemon Athletica inc. (NASDAQ:LULU)’s brick-and-mortar presence, taking the chain from 71 stores to 218 in just five-and-a-half years. However, same-store sales comparisons are beginning to slow and most growth is coming from store expansion rather than organic traffic and sales volume increases.