Dive Brief:

• Shares in Lululemon plunged 17% in late trading Wednesday after the retailer said it expects a same-store sales decrease in the low single digits for the first quarter of fiscal 2017, due to a spring assortment “lacking depth and color … compounded with visual merchandising that did not powerfully translate our design vision,” CEO Laurent Potdevin said on an earnings call with analysts, according to a transcript provided by Seeking Alpha.

• The company also reported that fourth quarter net revenue rose 12% to $789.9 million from the year-ago quarter. Q4 total same-store sales including e-commerce, rose 8%, or 7% on a constant dollar basis. Same-store sales rose 6%, and e-commerce net revenue rose 12% to $164.3 million. Q4 gross profit rose 21% to $427.9 million, and as a percentage of net revenue was 54.2% compared to 50.3% in the quarter last year.

• For full fiscal 2016, net revenue increased 14% to $2.3 billion from the year-ago period. Total same-store sales including e-commerce increased 6%, or by 7% on a constant dollar basis. Same-store sales increased 4%, or by 5% on a constant dollar basis and within that, company-operated stores averaged sales of $1,521 per square foot. E-commerce net revenue increased 13% to $453.3 million, or 13% on a constant dollar basis. Gross profit for the year rose 20% to $1.2 billion, and as a percentage of net revenue was 51.2% compared to 48.4% in fiscal 2015.

Dive Insight:

The Canadian retailer has had little room for missteps given the fierce competition in the athleisure space, a casual wear trend it is credited with launching several years ago. Yet the company has struggled with quality and supply chain issues, and even now that it has more or less corrected those obstacles, it's facing a problem with its assortment.

“[T]he performance that we’ve seen in Q4 was driven by the neutrals and the jewel tones that were perfect for the gift-giving season and especially Q3, Q4,” Potdevin told analysts on its Wednesday conference call. “I mean, in Q1, we should have been bolder with the color assortment and from a visual merchandising we didn’t bring that powerfully to life.”

Potdevin assured analysts the company has already reversed that trend, with new talent focusing on visual merchandising and a swifter supply chain that will get better product into stores. "You’re going to see more color showing up this next week actually and we’ve actually added a lot of creative resources both in men’s and women’s really our ability to bring visual merchandising to life in a much more powerful way.”

Increased competition has led to saturation in the athleisure space, says Neil Saunders, GlobalData retail managing director. "These things will take the edge of growth and may mean that Lululemon struggles to increase its comparable sales,” Saunders said in a note emailed to Retail Dive. Fortunately for the retailer, its innovative stance, which includes design as well as a focus on performance fabrics, will continue to give it an edge, as will its close attention to stores, he said.

The move to create “increasing room for experiences, from offering juice bars, community tables with WiFi and some with dedicated studios,” further boosts its appeal, according to Jane Hali and Associates analysts, who also noted that comfort remains a driver in apparel and fitness and wellness continue to be a consumer priority. “We believe the wellness boom remains strong,” Jane Hali analysts said in a note emailed to Retail Dive. “We expect brands like LULU to benefit from this lifestyle being adapted globally … We continue to believe athleiure styles will evolve to a more fashion forward look for outside the studio. LULU has started to push more product that suits this lifestyle with their ‘& GO’ section on their website.”

But the fact that Lululemon is pressing ahead in a niche market presents a challenge, meaning 2017 is likely to be more difficult than last year, Saunders said. “The company is not without firepower, especially on the innovation front. There are further product launches in the pipeline, included in categories like bras and some more menswear initiatives,” he said. “Growth will also be delivered through fleet expansion. This will come on two levels. An international push, including more aggressive growth in China and the recent opening of a flagship store in London, will help the brand grow its awareness in overseas markets. Meanwhile, closer to home, North American growth will be a combination of larger stores and smaller … local shops which are designed to cater to the needs of smaller markets.”

China is already proving to be a key market for the retailer, according to Jane Hali's note. “[T]his market is ramping up their interest in wellness. [Lululemon] has already brought localized events to China."