The news: Lululemon athletica lowered its full-year outlook despite beating sales and profit expectations in Q1.

• The retailer now expects revenues to be flat or decline 1%, a sizable downgrade from its prior forecast of a 2% to 4% increase.
• Revenues in the current quarter are forecast to decline between 2% and 3% as the company continues to navigate weakness in the Americas.

Zoom out: Incoming CEO Heidi O’Neill has a challenging job ahead of her. While lululemon’s settlement with founder Chip Wilson reduces some of the pressure—and public criticism—O’Neill faces the unenviable task of shoring up a company that is losing market and mind share. Unlike her predecessor Calvin McDonald, O’Neill does have experience in the apparel and sporting goods space from her time at Nike; however, that has also saddled her with baggage given her close association with Nike’s troubled D2C shift.

Fixing lululemon’s product pipeline will have to be at the top of O’Neill’s agenda. Multiple controversies involving sheer leggings have exposed the weaknesses in lululemon’s manufacturing and product development processes. At the same time, the brand has struggled to consistently roll out products people want to buy, saddling it with excess inventory and forcing it to increase discounting. Sales in the Americas have suffered as a result, with net revenues falling 3% YoY and comparable sales down 5% in Q1.

Implications for retail: Lululemon’s continued slump underscores how important having the right product is for any apparel retailer—especially one that charges a premium price point. At a time when shoppers have more choice for athleisure and are more discerning about where their dollars go, lululemon has to justify to shoppers that its assortment is worth the investment.

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