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Lululemon's story is stretched, but not torn

Lululemon Athletica Inc. undoubtedly hopes that its latest shuffle at the top will finally put its annus horribilis behind it. The purveyor of yoga gear's attempt to restore its slightly tarnished brand to its former stellar status should succeed, as it recovers from self-inflicted – but non-fatal – wounds.

Founder and largest shareholder Chip Wilson will relinquish his post as a meddlesome board chairman. Also, a new chief executive is coming aboard with exactly what the Vancouver company needs: broad international retail experience, particularly in the holistic, feel-good market segment occupied by Lululemon and its pricey clothing.

Laurent Potdevin, a Swiss native who is replacing lame duck Christine Day, started his career at French luxury kingpin LVMH Moët Hennessy Louis Vuitton SA and then moved on to run another iconic brand, Burton Snowboards. Before coming to Lululemon, he was president of TOMS Shoes, a California company that matches each sale with the donation of a pair of shoes to a needy child.

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Lululemon has tremendous opportunities for international growth. Its footprint in the U.S. market is still relatively small, and Europe remains a potentially major market, as the yoga craze spreads.

Ms. Day's otherwise strong record at the helm – which will be reflected in respectable third quarter gains coming Thursday – was damaged by the See-Through Fabric Fiasco last spring, when the company faced an embarrassing recall of black yoga pants that were more revealing than its wearers intended, causing a writedown of $17.5-million (U.S.) and sending its share price spiralling. Still, investors were stunned when she abruptly resigned in June but agreed to stay on until a successor could be found.

Mr. Wilson, never one to waste an opportunity to fuel a bit of controversy, managed to pour more oil on the nearly doused flames last month when he told a TV interviewer that some women's bodies just aren't meant for Lululemon's pants. "It's really about the rubbing through the thighs, how much pressure is there."

The insensitive comments sparked a predictable backlash, prompting an online petition calling for an immediate apology, as well as demands for the company to add more sizes to its collection to accommodate women of various shapes.

Critics warned that women would want nothing to do with a brand created by an Ayn Rand-spouting boor who encourages young women to embrace unhealthy body images. And few market observers see the stock doing much more than treading water until there is evidence of a turnaround. Just down the road, they see fierce competition intensifying from such athletic clothing giants as Nike Inc.

But they are underestimating the brand's continuing popularity, and the inroads it has been making in the men's segment of the exercise market over the past two years. Also, although it seems perverse, Mr. Wilson uncensored blathering could actually help the brand further differentiate itself from competitors that offer more choices for people of different body types and sizes.

Here's the sales pitch: If you don't see yourself as one of those women who needs a little more stretch in the stretchy fabric, then you will seek out the premium-priced product that signals you are young, fit, fashionable and socially conscious. Although customers might not be saying as much, they are letting their clothing choices do it for them. And the thinner the customers, the better the margins. Mr. Wilson has said that larger sizes require 30 per cent more fabric.

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The mistake some investors make when evaluating Lululemon is in thinking of it as merely another seller of trendy yoga wear in an increasingly crowded market. In fact, what's really happening is that customers are buying into a brand and the culture built around it. That's a deep moat for competitors to cross. Just ask all the coffee retailers that have been chasing Starbucks Corp.'s tail for years.

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