Lululemon (Nasdaq:LULU) announced April 3 that Chief Product Officer Sheree Waterson was leaving the company as of April 15. The retailer described the move as a "reorganization of our product organization." Although the company hasn't officially acknowledged that the move was due to the yoga pant debacle, their announcement came moments after they announced their luon Production Update.

Whether the organizational change was a result of CEO Christine Day throwing Waterson under the bus, or Waterson chose to leave on her own accord, the move might appease the board but it shouldn't do anything for investors. Read on and I'll explain why replacing Waterson isn't going to solve what ails it. Only by showing Day the door will LULU gain salvation.

Nothing New
In a March 20 article about Lululemon, I reminded readers that this wasn't the first time it's had quality control issues. The excessive sheerness of its black luon yoga pants is the fourth such problem to appear in the last year. Why didn't Day fire Waterson on one of the previous occasions? I realize this latest snafu is a much bigger deal, but - if Waterson is to blame for the lack of quality control - Day shows an incredibly naive sensibility for someone leading one of North America's strongest brands. You don't leave quality control to chance, especially when your price points are significantly higher than your competitors. If the CEO pays this little attention to one of its key differentiators (quality clothing), it's quite possible she does the same in other areas of its business including its finances.

Only in (North) America
I've often wondered about Lululemon devotees. It's not their decision to support the brand that puzzles me but rather how they didn't protest more when the company made known it's return policy plan. In the early days of this latest fiasco, Lululemon employees were evidently asking customers to bend over when returning the luon pants in question to confirm their excessive sheerness. The company flatly denies ever doing this but who are you going to believe: loyal customers unhappy about their treatment or the company that once claimed its pants contained seaweed, which of course they didn't.

Similar to its recent customer service faux pas, it's stringent return policy gives you just two weeks to return clothing and the original tags must still be attached. As Ashley Lutz of the Business Insider points out, Gap's (NYSE:GPS) Athleta brand allows refunds at all times no questions asked. Sterne Agee's Sam Poser insists that has to change if Lululemon expects to retain its perch atop the retail world. Hopefully, Day takes this advice in the future.

Don't believe me?
In March 2012, Day made fun of Nordstrom (NYSE:JWN) for standing behind the products they sell, opting to respect its customers by having an overly generous return policy. Day's words: "We aren't Nordstrom … We aren't your personal shopper." Day came from Starbucks (Nasdaq:SBUX), one of the best at providing good customer service. It's therefore surprising that she made a statement like this which seems to ridicule good customer service.

Why Sell?
I know what you're thinking. The earnings and revenues are still growing so what's the big deal. This latest mistake is nothing more than a blip on the radar. It too will pass. They've isolated the problem--faulty testing protocols-and now the company's stock can begin moving higher once more. But I'm a firm believer that where there's smoke there's fire. Day should maybe take a page out of Boeing's (NYSE:BA) PR book and act a bit more humble. Despite Boeing's battery problems being very costly, it didn't fire Mike Sinnett, head of the 787 program. It didn't throw anybody under the bus. Instead it went to work fixing the problem and with any luck planes will be back flying by May. That's how you run a company.

Bottom Line
It's easy to be good when things are going well. It's a lot harder when business hits a rough patch. I wouldn't expect the hiring of a new Chief Product Officer to change anything at the company. The honeymoon with Christine Day is over. It's only a matter of time before she wears out her welcome with investors. 

At the time of writing, Will Ashworth did not own shares of Lululemon.

Related Articles
  1. Investing

    The Ups And Downs Of Investing In Cyclical Stocks

    This strategy can be profitable but only if you know when to dump these stocks.
  2. Fundamental Analysis

    Financial Markets: Random, Cyclical Or Both?

    Are the markets random or cyclical? It depends on who you ask. Here, we go over both sides of the argument.
  3. Personal Finance

    Things You Didn't Know Could Get You Fired

    You can be fired for a number of reasons not yet outlined in your company handbook.
  4. Fundamental Analysis

    Understanding Analyst Ratings

    Discover whether analyst recommendations are really worth listening to.
  5. Economics

    Make Money With The Consumer Cyclical And Staple Indicator

    Knowing the difference between what consumers need and what they want can help you target your stock picks to follow consumer buying trends.
  6. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  7. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  8. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  9. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center