Insiders Think Lululemon Is In Serious Trouble

Lululemon’s new CEO has had an “uninspiring tenure” so far and the yoga brand is suffering from an exodus of loyal customers, according to analysts at Sterne Agee.

The firm has downgraded the retailer from “neutral” to “underperform,” citing lasting damage from product quality issues and difficulty attracting new customers, among other issues.

“Many customers have left and it’s hard to get them back, especially given the focus on the women’s active apparel business from brands such as Nike and Under Armour, and retailers such as Athleta, Sweaty Betty, Victoria’s Secret, and others which have bitten into LULU,” Sterne Agee analyst Sam Poser writes.

Here’s why the brand is in trouble, according to Poser.

1. Lululemon has lost customers’ trust. A large number of complaints on the company’s website about the quality of its products are “more indicative of the lack of trust in the Lululemon brand, not quality issues,” Poser writes.

“What made the company such a force to be reckoned with, up until mid 2013, in our view, was the fact that Lululemon offered one of the best, if not the best, combination of product and consumer/community engagement in all of retail,” he adds.

But a string of issues that started with the company’s recall last year of its Luon pants for being see-through has alienated once-loyal customers.

2. Declining store sales. Lululemon’s same-store sales fell 5% in the most recent quarter. Poser said that weakness is particularly alarming because a large chunk of its store base — approximately 40% — is less than three years old.

3. Stiff competition. Until Lululemon’s pants recall, the company’s loyal customers were oblivious to other athletic-wear companies, Poser says.

But competitors, such as Athleta, Nike and Under Armour, have swept in and stolen their attention with aggressive investments in their women’s’ business. Their efforts appear to be working, Poser writes. Nike and Under Armour both recently posted double-digit increases in their womens’ business.

4. Weakening customer service. Poser claims that the level of customer service in Lululemon’s stores is declining, “which has caused a deterioration of the value proposition.”

5. An expensive international expansion. Poser says the Lululemon’s plans to open one store in Singapore, one store in Hong Kong, and a second store in London is too aggressive. “We are surprised that LULU does not focus on one or two countries in order to have an opportunity to lever expenses in the near term, rather than open stores in far-off lands with little opportunity for leverage.”

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