Is Lululemon Athletica Inc. Stretched Too Thin?

Lululemon Athletica Inc. (TSX:LLL)(NASDAQ:LULU) has undergone a significant management reorganization, and investors are looking for signs of improved bottom-line profitability.

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Questions of management performance and if Lululemon Athletica Inc. (TSX:LLL)(NASDAQ:LULU) will be able to maintain a Canadian head office presence have plagued the company in 2016. Year-to-date, the company’s stock price is up 10%, but it’s down almost 30% from its peak in August. I will be looking at what investments the company has made in its “HR portfolio” and assess the company’s outlook moving forward.

Management reorganization and the company’s 10-year plan

Lululemon’s CEO Laurent Potdevin has made a number of changes to his executive staff since taking over the C-Suite in December 2013, and this reorganization appears to have settled down of late. His 10-year plan is underway, and investors are looking for sustained top- and bottom-line results–something that the company is in dire need of.

In recent years, issues with inventory management and executive management and retention have been bearish for the company’s stock, and the company is now looking to “cash in” on significant investments made in top-level personnel; one key person we will look at is newly appointed executive vice president, Creative Director Lee Holman.

Who is Lee Holman, and what has he done?

In October 2015, the company announced the promotion of Lee Holman to executive vice president, creative director, and much speculation was made about the potential impact Mr. Holman could have on the company’s fall 2016 product line. Mr. Holman was previously creative director at Nike Sportswear and held a range of comparable positions at Burberry, Abercrombie & Fitch, Levi Strauss & Co., and Paul Smith.

His tenured track record is one of significance, having played a large role in a major product redesign at Nike Sportswear. Such innovation is what Lululemon is in need of and is what we will focus on with Q4 2016 being an important litmus test.

Lululemon has seen Q3 net revenue increase by 15.2% year over year with net income increasing by only 3.6% largely due to rising SG&A costs. Investors will want to see a better return on the increased SG&A expenditures, and this will be a major focus during the next quarterly financials release.

Lululemon’s current HR situation

Reports have abounded that the Lululemon team, headquartered in Vancouver, is in serious need of talent at all levels of the organization and has been actively seeking talent from outside Vancouver due to the lack of experienced talent in the area.

These reports have led to speculation of the possibility of Lululemon moving its headquarters from Vancouver to Seattle or Silicon Valley. The company has recently moved its listing exclusively to the NASDAQ exchange with the vast majority of its revenues coming from outside Canada.

The move to transforming into a truly global sportswear leader will likely involve additional SG&A turmoil, and this is one of the key factors I will be continuing to assess over the short to medium term. For right now, stay cautious.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned. The Motley Fool owns shares of Lululemon Athletica and Nike.

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