Lululemon Athletica Inc. investors were spooked on Tuesday, sending the stock down more than 17 per cent after the surprise announcement late Monday that chief executive officer Christine Day is leaving without a successor in the wings, while other top executive positions remain unfilled amid a series of merchandising stumbles.
The uncertainty and “turmoil” at Lululemon, as one analyst described it, was driven home by the Vancouver-based yoga-wear retailer’s high-profile recall this spring of its signature black stretchy pants because they were too sheer, forcing it to take a $17.5-million inventory writedown in its first quarter.
“Things may continue to be choppy in the near- and intermediate term,” warned Howard Tubin, retail analyst at RBC Capital Markets.
Questions linger as to why exactly Ms. Day, who had been CEO for about five years and is credited with building the company’s crucial U.S. business, is stepping down so unexpectedly without having groomed an evident successor.
Her departure comes as Lululemon is embarking on an ambitious global expansion, raising further questions about whether the company can handle other miscues if they arise.
John Morris, analyst at BMO Capital Markets, who lowered his fiscal 2013 estimate to $2.09 a share from $2.05, said he has become “cautious” about Lululemon’s outlook “given the state of turmoil and change ahead for Lulu.”
“We are now in the midst of a major management transition, and with this transition comes more uncertainty,” Mr. Tubin added.
Ms. Day said on Monday that she is leaving for “personal” reasons at what she considers an appropriate time for a new CEO to lead Lululemon through its next phase of growth, noting it now has a five-year plan and “10-year vision” in place.
The company said in a posting on its website that Day’s leaving is not tied to the black-pant glitch, adding Lululemon has recovered from the setback. The retailer started to replenish store shelves in late May, within 90 days of having pulled the pants, and will have all of them back in stores by August.
Ms. Day addressed other recent product missteps, such as too many colourful tops, too-short jackets and unpopular black biking clothes rather than last year’s fast-selling prints. “Taking risks means we’ll make a few mistakes along the way, but it’s part of our DNA and has been a driving force behind our success to date.”
Still, even the company anticipated the doubts, posting answers to potential questions on its investor website, such as whether Ms. Day’s decision to leave was voluntary. “The decision to leave was entirely Christine’s,” it said, adding that she will stay until the end of 2013 or until a successor is named.
The company also asked in its posting whether she had a falling out with Lululemon founder and chairman Chip Wilson or the board. Mr. Wilson’s assistant said he was too busy with company meetings to respond to a reporter’s query.
The company said: “Working with the board, Christine has built a world-class team that has produced one of the best growth, brand and profit stories in retail and has put in place a sound strategy that takes advantage of Lululemon’s leadership and world-class business model.”
Still, industry watchers had lingering doubts. “We still believe in the demand side of the equation, but CEO Day’s unexpected departure was a tipping point following the recent loss of the chief product officer, quality-control issues and internal Q4 execution issues,” said Roxanne Meyer, an analyst at UBS, who lowered her 2013 estimate to $1.96 from $2.06. “… We have less visibility and confidence in merchandise/operational execution and see risk.”