Lululemon’s incoming CEO has a mountain of problems to fix

When incoming Lululemon CEO Heidi O'Neill starts her new job on Tuesday, she will have a lot of heavy lifting to do.

Last week, the struggling athleisure brand reported another dismal earnings report, posting a 12% drop in sales in North America and slashing its full-year outlook for the second time in three months. Shares fell roughly 20% on Friday, with the stock hovering at an eight-year low.

Lululemon pinned the slowdown on a decline in products it's best known for, like leggings, which saw a 20% plunge in sales. Another setback was an incident in which the company mistakenly used a Japanese drum for a promotion in China, sparking backlash and hurting sales.

The disappointing quarter only further underscored the company's years-long decline due to a litany of problems: customers defecting to trendier rivals, a public fight with founder Chip Wilson that's been put on ice and a broader pullback in consumer spending .

Where does that leave O'Neill, a former Nike executive, when she enters Lululemon's headquarters in Vancouver?

Well, in an "unenviable position of leading a company that is in a worse position than when she accepted the job," said Sky Canaves, a principal analyst at research firm Emarketer.

With sales in North America falling and its momentum overseas stalling, Lululemon has "wider problems with both product and marketing in what is an increasingly competitive activewear space," she said.

O'Neill has to reposition the brand to appeal to younger shoppers who have shifted their spending to Alo for yoga clothes or FP Movement and Vuori for activewear and continue to dial back discounts.

There's "no external reason for the numbers to be quite this bad" since the athleisure sector is healthy, according to Neil Saunders, managing director of GlobalData.

"A combination of an incredibly boring assortment, too much non-core product that misses on both fashionability and style, and an absence of good technical innovation have all contributed to a rapid loss of brand heat," Saunders wrote in a note.

With O'Neill, investors will be "desperately looking for a very clear course correction strategy that puts Lululemon back on stable footing," he said.

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