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Lululemon: Will They Turn 'Bad' Marketing Story Into Lemonade?

I am sitting at a Starbucks across from Lululemon on the Upper West side of Manhattan. I find this somewhat ironic given that Lululemon has done for athleticwear what Starbucks seems to have done for coffee. No, it didn't just inflate prices and make it yuppie-wear, Lulu glamorized it.

The company is making athleticwear approachable and fun-- an experience more than a reminder of unpleasant trips to the gym. I wish I could claim that the Lululemon Starbucks comparison was my original work, but to be honest, the first comparison of the two was made by a Canadian shopper who was browsing the racks at the store itself.

I spent the morning reporting on the stock reaction to news reportsthat the company falsely advertises materials used in its products. Specifically, the New York Times ran a story that Lululemon's Vitasea line, which claims to contain a seaweed compound called 'Seacell,' actually tested negative for any such fibers. Why does that matter and why would the stock sell off so steeply in reaction?

Marketing matters. Image matters. As one analyst told me, Lulu has pushed a 'holier than thou' and healthier than thou image. Selling that image of healthfulness (seaweed fiber clothing that moisturizes your skin while you're working out?!) has helped Lulu justify selling its relatively pricey T-shirts for $50 and its sportsbras for $44. Today's NY Times story is a short sellers' dream and a p.r. nightmare.

Given the stock reaction, it is hard to argue that the story "doesn't matter." The dropoff today is a reversal of fortune for a company whose stock has been up 25% since its July initial public offering. CNBC's Jim Cramer was a big "fan" of the stock (he's changed), comparing Lulu's success to that of sportswear company Under Armour and hot shoewear stock Crocs .

Anyhow, my initial reaction to the story was of course, marketing is false. After all, it is marketing. That's 90% public relations. Haven't we all bought eye cream/eye makeup/perfume/clothing hoping that its secret ingredient would make us look like Cindy Crawford in the morning? That said, this allegation is more serious than if the seaweed product simply didn’t moisturize your skin. Instead, the product doesn’t contain what the label says it does. That's a step beyond false advertising. That's misrepresenting a product, the brand and a company risks losing brand equity since consumers won't 'trust' the retailer as much.

In the long run this scandal has the potential to just become a short term headline risk for the stock and not actually impact sales (that's my take at least.) That is, if the company gets out in front of the story and apologizes to customers. They should also do their own testing and make it public if the manufacturer duped Lulu as much as the public now believes the company duped consumers.

This isn't the same caliber of offense as Nike hiring manufacturers who employ children. However, the scandal is a step beyond false advertising. It is definitely the first 'chink in the armor' of company who up until now has been a success story.

That said, I went into the store to look around and found the sales people very friendly, the product solid (though pricey--you're supposed to SWEAT in it, right?) and the layout aesthetically pleasing. Customers said they bought the product because of the fit and the fashion. Not because they thought the seaweed as moisturizing their skin.

That said, the image did take a bit of a beating today. And we still haven't heard back from p.r. or investor relations. Looks like Lululemon is hoping that this story will just go away.

Questions? Comments? retaildetail@cnbc.com

Retail

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