Lululemon: Bottoms Up?

 | Mar 26, 2014 | 1:30 PM EDT
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Lululemon Athletica (LULU) reports Thursday, and while expectations are under the yoga mat, guidance will likely be below the Street.

But here is the good news: The "I can see right through you" issue is a thing of the past. You may recall that close to 20% of the company's bottoms had to be recalled for "transparency" problems last year. Finally, we are facing the anniversary of product issues that sent this company into a downward dog spiral over the past year.

Investors have been incredibly frustrated that quality-control issues took a full year to be solved. But what would you expect from a company that has been in management limbo over the same time period? Having ex-CEO Christine Day announce her intention to depart and all the while sticking around for way too long took its toll.

While sales fell off a cliff in January, however, things have been improving. Stores are finally back in stock and reflect Lululemon's creativity in matching workout wear with street wear. The recent &go apparel line launch is a new catalyst. Men's also continues to gain traction. No, we are not talking men's spandex. Check it out for yourself.

The company has also refocused and filled management vacancies. New CEO Laurent Potdevin, who comes to Lululemon from Toms Shoes, has a lot of pressure going into the upcoming analyst day. So, while we expect better trend commentary on the fourth-quarter call on Thursday, we also expect guidance to be pretty uninspiring. That is a good thing, though, as we need to reset the bar and create upside possibilities.

Lululemon has 170 stores in the U.S. and is just getting started internationally. The competition is heating up on the international and domestic fronts, with H&M, Forever 21, Urban Outfitters (URBN) and several others entering the space. The new CEO needs to embrace the new landscape and convince us that Lululemon is willing to get in the game -- even at a cost. The real catalyst going forward will be the company's international growth plans.

An improvement in comps may be the short-term catalyst, but I want to know how Lululemon is going to compete on a global basis.

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