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Lululemon CEO Christine Day (Lindsay Siu/Lindsay Siu)
Lululemon CEO Christine Day (Lindsay Siu/Lindsay Siu)

Has the Lululemon story changed? Add to ...

The shares of yoga wear maker Lululemon are being bent out of shape today, taking a tumble in the wake of the announcement that highly-regarded CEO Christine Day is departing from the Vancouver-based company.

The stock was recently at $69.74, down a massive $14.29 or 17 per cent in active trading on the Toronto market.

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It’s been a down day generally on world markets because of jitters that the U.S. Federal Reserve might dial back some of its monetary stimulus program, but Lululemon’s stumble is among the larger moves and comes as the company reported decent quarterly profit figures.

Analysts say the stock’s problems are entirely due to investor dismay over Ms. Day’s exit.

Despite the good profit numbers “the surprising announcement of CEO Christine Day’s departure is the relevant development that will weigh on the stock in the near term,” commented analyst Camilo Lyon at Canaccord Genuity in a note to clients. “We are fans of Ms. Day’s as she was instrumental in building the Lulu brand to where it is today.”

Although there aren’t many details on why Ms. Day is leaving, the thinking at Canaccord is that the exit is due to Lululemon’s problems earlier this year with stretchy yoga pants that were a bit too sheer.

When a well-regarded consumer products company has quality problems, it’s always a development investors should note. There is also worry that the market will really pound the stock if there are any more similar product errors.

Accordingly, Canaccord has cut its price target to $87 (U.S.) from $92 but continues to view the company as a “buy.”

“At this time, we have no reason to believe the fundamental growth trajectory of the business or consumers’ desire for the brand has changed, but recognize the risk profile is greater today,” the firm said.

Other analysts are more cautious. At RBC Capital Markets. analyst Howard Tubin says the company is “in the midst of a major management transition,” given the earlier departure of Lululemon’s chief product officer.

“While we continue to believe the Lululemon brand is strong and we remain believers in the long-term growth potential of the company, the Lulu story today is not exactly the same Lulu story that we’ve come to love over the last several years,” Mr. Tubin said in a research report.

He rates the shares a “sector perform,” with a $70 price target, based on an estimate that the company will earn $2.44 a share in 2014.

“We would look for improved viability on the management front to gain more comfort with the story,” he says.

A bear on the stock says the turmoil reinforces his negative opinion. John Zolidis, an analyst at Buckingham Research Group in New York, recommends investors reduce positions and he cut his price target to $61 from $62 on Tuesday

He says the company has had “recurrent execution issues,” operating margins have peaked, and although it has successfully launched a major new athletic clothing brand for women, the company faces headwinds.

“Over time we expect slower sales growth due to maturation in Canada, increased competition and weaker sales in U.S. vs. Canada,” he told clients.

Investors should also keep in mind that Lululemon is an expensive stock, with plenty of hope and expectations built into the price. Before the Tuesday drop, the shares had been trading at 44 times last year’s earnings, a high P/E multiple.

Lululemon’s first quarter profit came in at 32 cents a share, compared to earlier estimates of 30 cents.

 
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