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.

To add fuel to the fire, Christine Day also announced that she’d be stepping down as CEO of Lululemon Athletica inc. (NASDAQ:LULU) as soon as a successor was named, causing Lululemon’s share price to dive more than $10. Day’s departure was cited as being for “personal reasons,” but it can be taken a number of different ways.

First, it could be a signal that growth is in fact slowing and she’s running out of answers as to how to reignite the Lululemon engine outside of merely opening new stores. Second, it could be another affirmation that the onus of fault for the Luon yoga pants product recall falls squarely on her shoulders. The timing couldn’t be worse for her coming resignation, as investors were going to utilize the bullishness of this report (the company handily topped Wall Street’s expectations) to put the product recall safely in the rearview mirror, but now have it back in the forefront again.

We’ve seen far more foolish acts from CEOs for sure in this series, but it’s not often that a simple resignation can bring back bad memories for shareholders and wipe out in excess of $2.2 billion in market share in just three days.

Do you have a CEO you’d like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week’s nomination, and you just may see your suggestion in the spotlight.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool recommends Lululemon Athletica inc. (NASDAQ:LULU), Nike, and Under Armour Inc (NYSE:UA). The Motley Fool owns shares of NIKE, Inc. (NYSE:NKE) and Under Armour.

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