A New CEO Inherits LULU's Woes as Product Appeal Fades in Key Markets

**Nicole** (0:00)
And it's time for our panel when we're digging into the very latest details from LULU Lemons, the latest earnings report and some weakness within the story. Melissa Otto, head of Visible Alpha Research is here, S&P Global Market Intelligence, and Bryan Gildenberg, Managing Director, Retail Cities. So glad you're both here. So let's talk about this, Melissa, some of your takeaways from LULU today.

**Melissa Otto** (0:25)
First of all, thanks for having me here. Always great to see you.
What a dog. I mean, this company has just not been delivering. I mean, talk about fundamentals that are just consistently quarter after quarter eroding. I mean, this is disturbing what we're seeing in these sales numbers. The brand is not resonating, the product is not resonating, either in the US, in China, even any of the overseas markets. I'm not sure what there is to like, other than the valuation.

**Nicole** (0:58)
It did have a beat on the EPS and this on the revenue, and there were a lot of concerns about different things, whether it was China or the leggings, they're notorious for the leggings, and even the leggings story has fallen roughly about 20%. What are your thoughts here, Bryan?

**Bryan Gildenberg** (1:13)
Yeah, first of all, good to see you again, Nicole. Yeah, pretty similar, I think. So this is clearly going through some hard times, I think they've had a perfect storm, I think some of which my friend there has outlined already. I would also just say in general, I think the fashion world has moved against them. And in particular, I think it's the leisure side of Athleisure that's just back, the, I don't think Lululemon has responded particularly quickly to what they call the away from body cuts, which are basically the non-tight leggings, where, which are kind of at the core of where their leggings business is really struggling.
I do think that there's a lot of, I don't know, blames the right word, that certainly caused from the previous administration, particularly around the store expansion, that may have been built too fast with stores that were too big. Just think in general, the competitive side here has gotten really tough with Aloe and Biore, as well as some of the bargains, the bargains you can get directly sourced from China on Amazon. I guess this is a really tough space.

**Nicole** (2:14)
We think about the turnaround that the company has had, and the CEO, that's his turnaround there. You have a new takeover, the former Nike executive, Heidi O'Neill, takes over September 8th. Let's talk a little bit about what's happening going forward. What can this company do? They did get the bright spot of the tariff refund, which actually helped many of the...
I'm a little worried about the next earning season because so many of these retailers did get a nice tariff boost. But what are your thoughts on the outlook going forward? Because we have Aloe, Biore, and as you noted, you have big concerns about LULU's fundamentals.

**Melissa Otto** (2:49)
Yeah, I mean, she's got a tough job ahead of her. I mean, coming from Nike, I think she's probably got a lot of great experience and can probably bring some of that athletic leisure perspective and brand renaissance to the company. But she's got to hit the ground running. Investors are just not happy with the way that this company has performed.

**Nicole** (3:19)
I also think about the China story.
That's supposed to be getting stronger, not weaker. And we saw those sales slow. Bryan, how worrisome is that story?

**Bryan Gildenberg** (3:30)
Well, I think there's three factors. One is just market-specific execution issues, and that's a worry. Two, a fairly notorious social media blunder, which involved the Japanese drama on the Great Wall of China, which probably didn't go over all that well.
I also do think that the Chinese economy, particularly for China's economies and trade-down mode as well, at the moment, is it's not growing as fast as it's been historically. Chinese shoppers are getting more comfortable with the idea that non-American brands may represent great quality and value, as opposed to really thinking that they needed to buy American, or Canadian rather, to get the great quality that they were used to. I think Chinese consumers, I think are definitely starting in a number of categories, to be favoring their own domestic brands a little bit more. And none of that's going to help, none of that's going to help Lululemon particularly. So I think again, you've got a perfect smaller storm over there as well.

**Nicole** (4:30)
Increasingly, this is seeming more like a brand product story than it is, in fact, a weak consumer, because we did see consumers spend in certain stores or certain areas, Melissa. What are your thoughts on the consumer? I mean, they have the ability, I guess, to turn this around if they start shopping there, but North America is a problem for Lululemon. Your thoughts on the consumer and the outlook?