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Updated: Tue, 11 Mar 2014 09:10:00 GMT | By Richard Warnica

Can Lululemon’s new CEO save the company?

Laurent Potdevin isn't in for an easy ride


 (© Nikki Ormerod)

(Nikki Ormerod)

One morning late last year in sunny Los Angeles, Laurent Potdevin turned off his alarm clock, got out of bed and padded down the hardwood stairs to his kitchen. Potdevin, who has the weathered face of a snowboard dad, wore black-and-white slip-on shoes made by Toms, the company he'd led as president since 2011. Holding an I Love LA mug, he posed in an easy chair next to a stack of leadership books.

Afterward, Potdevin walked to the dining room table and slipped off the Toms. The move was symbolic: Potdevin was moving on, as the video recording the moment was designed to illustrate. He then picked up a silver fountain pen and flicked through the pages of a contract laid out in front of him. At the bottom of the last page, he signed his name. "Laurent Potdevin," the contract read, "CEO, lululemon athletica."

The corporate video, posted on YouTube (see below) following the announcement of Potdevin's appointment, ends with the new CEO folded in a yoga pose, smiling wryly at the camera. It may be the last smile he enjoys for some time. Potdevin joined Lululemon at the tail end of the worst year in company history. He officially started his job in January amid falling in-store sales, a host of analyst downgrades, revised fourth-quarter earnings projections (the company slashed net revenue estimates to $515 million from $537 million), and a once loyal fan base raising concerns about product quality.

"Lululemon is tanking in every regard," says Shareen Woodford, a Toronto yoga instructor who has watched her students abandon the brand in recent years. In an average class not long ago, 95% of Woodford's students wore Lululemon, she says. Now that figure is closer to 25%. "The thrill is gone," she says. "There are better options."

To get Lulu back on track, experts believe, Potdevin needs to repair a brand tarnished by last year's see-through yoga-pants disaster , fend off new competition from well-heeled rivals Gap, Nike and UnderArmour, and keep growing fast enough to mollify the suddenly dyspeptic public markets. "I hope he's the right guy for the job," says James Smerdon, director of retail consulting at Colliers International in Vancouver. Lululemon investors-and the company's once obsessive fans-will be hoping the same.

The Swiss-born Potdevin isn't in for an easy ride, but his resumé shows him to be well-qualified to try. He started his career at LVMH, the parent company of Louis Vuitton, and moved rapidly through its ranks, becoming head of its North American operations before his 28th birthday. According to his official corporate biography, he was charged with modernizing and wringing efficiencies from the company's continental supply chain. But it's his experience with Burton Snowboards, where he worked for 15 years, that offers the most parallels to Lululemon and the corporate challenges he'll be facing there.

Who loves Lulu? Lululemon may have turned off some fans in 2013. But recent research by Cowen and Co. shows three million Americans still count the brand as their No. 1 choice for athletic wear. So who loves Lulu? Pretty much who'd you'd expect: young, wealthy women who care about fashion, food and fitness.

1% of American adults and 2% of American women prefer Lulu to other brands when it comes to athletic wear

3% of young women (18 to 34), 5% of high-income women and 8% of women who are both young and have a high income think Lulu is tops

When it comes to eating, 56% of female Lululemon fans avoid processed foods "often or strictly"

53% of female and 50% of male Lulu lovers prefer organic food and are willing to pay for it

73% of female Lulus are considered "fashionistas," compared to 57% of Nike fans and 49% of UnderArmour buyers

Founded in a garage in 1977 by Wall Street washout and boarding pioneer Jake Burton Carpenter, the company was already by far the biggest name in snowboarding when Potdevin joined as director of operations in 1995. Still, it was a long way from Louis Vuitton. Based in tiny Burlington, Vt.-population 45,000-Burton was a private company whose fortunes were tied to a fringe sport some still thought of as a passing fad. For Potdevin, in other words, it was a big risk. But it was one he was ready to take. (Years later, he would describe his decision to accept the job as a "Vermont leap of faith.")

Potdevin's years at Burton were dominated by two interrelated challenges that will sound familiar to Lululemon watchers: he had to grow the business. But to do that he needed to expand the company's appeal. The hardcore snowboard market was loyal and growing, but like the yoga niche, it was limited. And the company's sales at the time were dangerously weighted toward hard goods-snowboards, bindings and other technical gear. That left Burton vulnerable to bad snow years, when sales would drop, or to new rivals who could swoop in and steal a chunk of the market.

One of Potdevin's early priorities was to milk more from the Burton brand itself. "He recognized that there was more of an opportunity in non-technical soft goods," says Tyson White, who was hired to help expand Burton's apparel offerings in 2002. Most action sports brands, White says, made more than a quarter of their sales from basic clothes-T-shirts, hats, hoodies. But at Burton, that business was almost non-existent. Potdevin changed this, quickly. Under his direction, White set up Burton Basics, a new line of simple branded clothes. "It was such low-hanging fruit," White says. "I think in the first year it went from US$1 million to US$8 million." By the third year, sales had reached US$27 million.

Potdevin also pushed Burton to look beyond the snowboard market. By the time he became company president in 2002, Burton already had a standalone shoe line, Gravis, and was in the early stages of rolling out Analog, a new clothing brand. Potdevin doubled down on both initiatives. The end goal, he said in an interview in 2003, was to turn Burton into a "global lifestyle products" firm.

It wasn't always an easy transition. Burton had a unique culture long geared toward a single product: snowboards. As it expanded into new lines and categories, established figures within the company jockeyed over who got to control what and why. Potdevin, though, was adept at managing the politics-a trait that could serve him well in his new position. "When we ran into roadblocks, he removed them for us," says White, who ran the Analog brand. Eventually Potdevin removed Analog and White entirely, setting them up in a new California headquarters far from the Burlington bubble. The move, White says, was on one level about getting a brand that was more focused on surfing and skateboarding to the West Coast where it made more sense culturally. But it was "probably one part to get us out of the political environment we were stuck in," White says.

Having set up new brands within the company, Burton under Potdevin also moved aggressively to scoop up other existing lines. In 2004 the company bought four snowboard lines-Forum, Special Blend, Jeenyus and Foursquare-from Four Star Distribution. Later it expanded into surfing, with the purchase of California's Channel Island Surfboards, and skateboarding.

Burton is privately owned, so it's hard to say exactly how those moves played out financially at the time. But when Burton Carpenter stepped down as CEO in 2005, he named Potdevin as his replacement, a clear endorsement of Potdevin's tenure.

Watch lululemon - The CEO video

Not everyone was enamoured of Potdevin's time at Burton, though, and the downside of his growth strategy illuminates the challenges the Lululemon brand faces as it grows. Burton was easily the largest player in all of snowboarding. As it grew, "it became a little less cool in the eyes of some core boarders," says Mike Lewis, who covered Potdevin for years as the editor of Transworld Business magazine. As Burton expanded beyond snowboarding, it further alienated the hardcores who'd long made up its customer base.

That ill will deepened in 2008 and beyond. The financial crisis coincided with a dry winter on the slopes, which meant a double whammy for anyone in the ski and snowboard business. Many felt Burton-and by extension Potdevin-stayed strong through that crisis by pushing retailers to buy more boards than they could sell to customers. Over the next several years, Burton's perception problems grew (including bad PR from a line of Playboy-branded snowboards). And when sales didn't pick up in 2009, Potdevin initiated the first of several rounds of layoffs, followed by the closure of the company's Vermont manufacturing plant in 2010-a heavy blow to one of the state's iconic firms.

Six weeks after that announcement, Potdevin stepped down as president and CEO of Burton. In the snowboarding community, the news was greeted with no little joy, especially after Burton Carpenter himself announced he was taking over again as CEO. "I don't want to say it was all on [Potdevin's] plate, but many retailers were definitely happy to see him go," says Lewis. "From a public perception point of view, I think he ended up as a bit of a scapegoat."

After leaving Burton, Potdevin worked as a consultant for a year. In May 2011, he took over as president of Toms, a private California company considered a leader in the burgeoning field of social capitalism. (For every pair of shoes or glasses Toms sells, it gives another pair to charity.) Last December, Potdevin announced he was leaving to become Lululemon's new CEO.

He takes over a company facing familiar challenges. Like Burton, Lululemon has a mandate to expand-fast. But as the past year has shown, it doesn't yet have the infrastructure in place to do that well. Analyst John Zolidis highlighted the chain's problems in a recent note to clients. "We believe [former CEO Christine Day] has set up her successor very poorly," he wrote. "The company has significantly under invested in infrastructure. It is pursuing a reckless growth strategy internationally. It is also facing a significant increase in competition."

To keep that growth up, Lulu needs to find new customers beyond its traditional core. But, just like Burton before it, it has to keep its core consumers (in this case female yoga fans) happy while it does.

The similarities go on. Both Burton and Lululemon have reputations for quirky corporate cultures reflecting the activities that made them big (snowboarding and yoga). They both have charismatic founders (Jake Burton Carpenter and Chip Wilson) who are not afraid to stick their noses back into the business if necessary. Both even had, at one point, sales weighted uncomfortably toward a single gender. (Burton has struggled to expand to female snowboarders, while Lululemon is trying to get more men .)

But Lululemon also has problems that are uniquely its own. And those problems are only getting worse. The recall of a massive batch of too-sheer yoga pants last spring was embarrassing. Then-chairman Chip Wilson's comments in November about what kind of women should and shouldn't wear Lululemon clothes were ham-fisted. But the sudden drop-off in sales in January, which pointed to a deeper dysfunction, was arguably worse than both of those combined.

At a January investors conference, Lululemon executives suggested a host of reasons for the decline: bad weather caused by the polar vortex; poor product mix; insufficient seasonal merchandise; broader economic conditions. But none fully satisfied the analysts. In the aftermath, many turned on Lululemon's stock. Omar Saad, from ISI Group in New York, slashed his price target for the company to US$50 from US$80. Zolidis went even further, lowering his price target to US$40 and urging his clients to stay away. Even some of those mostly optimistic about Lululemon's long-term future were now preaching caution. "We still don't have much clarity on what exactly has led to such a sharp deceleration in sales, and therefore don't know what the fixes are," Faye Landes and Tal Lev of Cowen and Co. wrote in a note to clients. "We prefer to stay on the sidelines until the dust settles."

One thing seems clear: yoga students-the brand's hardest-core fans-have largely turned on Lululemon, says Stefanie Byrne, who co-owns the Ashtanga Yoga studio in Toronto with her husband. The big issue, Byrne says, is quality. "We found that our students are happy with Lululemon clothing they bought maybe four or five years ago, but they aren't as happy with the selection or quality of what they bought in the last year or two."

Other yogis have been turned off by the company itself, says Woodford. "People are realizing that you don't have to spend $100 on a pair of pants to practise yoga," she says. Add in what Woodford calls the company's "embarrassing escapades"-the see-through pants fiasco and Wilson's November comments that the company's garments aren't meant for bigger women-and Woodford believes Lululemon may have lost the yoga market for good.

That doesn't mean the situation is hopeless. The company still has significant strengths: at the investors conference, which served as a coming-out party for another key executive-Tara Poseley, the company's new chief product officer-attendees were impressed. A veteran of Gap and Kmart, Poseley was hired to replace Sheree Waterson, who left the company shortly after the sheer-pants disaster. Poseley hasn't yet had time to put her stamp on Lululemon's lines. But Landes and Lev came away "confident she [was] the right person for the job." "She spoke convincingly of the need for LULU to maintain high quality standards ('I don't want it to be a conversation') and to drive innovation," they wrote. "She also demonstrated a strong understanding of the intricacies and complexities of product design and execution."

Some also see considerable upside for the retailer's flagging stock. In mid-February, investment giant Capital Group more than doubled its Lululemon stake to 12.7 million shares, or about 11% of the company.

David Ian Gray, the principal consultant at DIG 360 in Vancouver, still considers Lululemon "an incredibly successful brand." But in the short term, he thinks Potdevin should focus on managing expectations. A realistic path for the company going forward, he believes, would see it enjoy steady, solid gains, without the kind of exponential growth investors have become used to in recent years. "They have a new leader coming in, and I think that's the perfect time to do a reflection, to think about 'who we are, what do we want to keep, what do we want to change,'" he says. "There's so many assets in that company still that there's probably more positive than negative ahead. But if they ignore some of these things, like the quality issues, how they might adapt the culture, bringing in better practices-I don't know why they would ignore those things-but if they do, it could really blow up on them."

The challenge for Potdevin then will be to reinforce Lululemon's strengths, by cleaning up the supply chain to stamp out quality issues, and re-engaging with the company's core customers while at the same time delivering enough growth to keep investors-who saw their Lulu stock fall from over $85 to under $63 a share in 2013-happy. Luckily for the company, Potdevin has faced those challenges before. "He's very shrewd," says his former colleague White. "He's about running the business. He doesn't get lost in the weeds."

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