Lululemon stock drops after its says Q4 revenue, profit will be lower

TORONTO – Lululemon Athletica Inc.’s unexpected lowering of its fourth-quarter profit outlook sent its stock tumbling Monday and raised questions about how long the yoga fashion retailer’s problems will last.

Chief financial officer John Currie said Monday that the company was on track to deliver on its sales and earnings guidance through December, but had seen traffic and sales trends “decelerate meaningfully” since the beginning of January.

“As we end 2013, we are starting to see the results of the significant investments we made throughout this past year to strengthen and enhance our back-of-house product operations structure,” Currie said.

“While we realize that it will require continued investment and time to get to best-in-class status, with our new leadership in place we are very focused on building on this stronger foundation to execute our long-term growth strategies.”

But analysts questioned the Vancouver-based company’s (Nasdaq:LULU) future amid guidance revisions that, as Cowen and Co. analyst Faye Landes put it, are “starting to feel like a chronic injury.”

“To say that these are weak results would be an understatement,” she said in a note to clients as she downgraded the stock from outperform to market perform.

“We are losing count of the number of intraquarter guidedowns that the company has had in the past year plus, which is not what we, or anyone else, wants to see in what is ostensibly a growth stock.”

John Zolidis, an analyst with The Buckingham Research Group, reiterated his underperformance rating, noting that “we are closer to the beginning of problems for Lulu than their resolution.”

“Revised guidance implies sales ‘fell off the cliff’ in January,” he said in a note to clients, adding that while many investors credit former CEO Christine Day with Lululemon’s success, she has done a poor job of setting up her successor.

“Experience suggests this will not be an easy fix,” Zolidis said.

“Lulu enjoyed several years of extremely strong growth as a faddish demand for its product produced record setting levels of sales productivity and the highest ever operating margins we’ve seen for a specialty apparel retailer. Those days are now behind the company (and Lululemon) has never operated in an environment of declining sales demand.”

Lululemon isn’t the only retailer facing headwinds as American shoppers deal with an uncertain economic recovery and more U.S. giants, such as Target, move into what’s already a competitive retail space in Canada and put pressure on pricing.

But the company has suffered some specific setbacks of late — including its handling of a problem with its black Luon pants, the fabric of which was sometimes so thin, the pants were see-through.

Lululemon said the problems were due to a style change and production issues and moved to fix them, but new complaints emerged later about the quality and durability of the pricey workout gear.

Day, who had been seen as a key part of Lululemon’s recent success, announced in the summer she would leave. On Dec. 10, the company hired Laurent Potdevin as her successor and said Lululemon founder Chip Wilson would step aside as chairman of the board but remain a director of the company.

Wilson ignited a public relations crisis for the company in November by suggesting to Bloomberg TV that Lululemon’s yoga pants don’t work well for some women.

His comments about “the rubbing through the thighs” and “how much pressure is there” when some women wear Lululemon pants led critics to accuse Wilson of shaming women’s bodies. He later posted a video message online taking responsibility “for all that has occurred.”

In December, the retailer warned of a tough holiday season as it worked to win back customers after those missteps, and said same-store sales for the key holiday period would likely be nearly flat even as it reported improved third-quarter earnings.

“This was a company and a stock that could do no wrong for so long and it’s a good reminder for investors that even the most pristine of stories in the stock markets can lose a bit of lustre over time,” said Craig Fehr, Canadian markets specialist at Edward Jones in St. Louis.

“When you’re in the consumer space, you not only have to fight the financial issues, you also have to fight the public persona, the PR issues,” he said.

“It’s a pretty big storm for them. Not to say they can’t weather it, but they are certainly up against a lot of scrutiny from the investment community.”

Despite Lululemon’s troubles, analysts had been expecting the company’s actual results to be slightly above the previous guidance on revenue and earnings, estimating 79 cents per share of adjusted earnings and US$542.4 million of revenue, according to Thomson Reuters.

In its revised guidance Monday, Lululemon said it now expects its revenue and profit for the fourth quarter ending Feb. 2 will be significantly lower than its previous estimate before Christmas.

Lululemon’s new revenue range is between US$513 million and US$518 million, about $22 million lower than the previous guidance. The company’s new estimate for diluted earnings per share is between 71 and 73 cents per share, a reduction of seven cents.

Lululemon shares were down $9.83 or 16.5 per cent at US$49.77 on the Nasdaq market.

The stock also dropped dramatically on Dec. 12 after its previous guidance announcement was below expectations. Lululemon said at that time that it was expecting between US$535 million and US$540 million of revenue and earnings of between 78 and 80 cents US.

Prior to the December guidance for the fourth quarter, which spans the important Christmas and new year shopping period, Lululemon shares had been trading above $65 per share for most of 2013 and usually between US$70 and US$75 per share.

RBC Capital Markets analyst Howard Tubin noted Monday that the guidance would lead to the first negative same-store sales for the company since the second quarter of 2009 if it plays out.

Note to readers: This is a corrected story. It clarifies that the drop in sales has been in January, since the end of December.