Last year’s troubles are spilling into 2014 for Lululemon Athletica Inc., threatening to dampen the yoga-wear chain’s ambitious expansion plans.
The Vancouver-based retailer warned on Monday that sales and the number of shoppers in its stores fell “meaningfully” so far this month, leading it to reduce its fourth-quarter sales and profit outlook. Analysts now say that the chain’s problems are beyond a quick fix and could persist through the year. The company’s stock tumbled more than 16 per cent.
The disappointing performance comes after a year or more of stumbles and leadership changes at Lululemon, including being forced last spring to pull its signature black stretchy women’s pants because they were too see-through. The company is heading into a period of further uncertainty as it tries to iron out the wrinkles under a new leader, who starts on Jan. 20.
“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,” said John Currie, Lululemon’s chief financial officer.
Premium-priced Lululemon has been hit by production problems, the threat of growing competition from cheaper players such as apparel chain Gap Inc. and the resignation of founder Chip Wilson as chairman after he told a television interviewer that “some women’s bodies just actually don’t work” for its yoga pants, which sparked a backlash. In an unpredictable economy, Lululemon needs to repair the damage and ensure its new executive team doesn’t get distracted by its expansion plans for Europe and Asia.
“It is no news that the company faced many challenges in 2013,” Faye Landes, an analyst at Cowen and Co., said in downgrading Lululemon’s stock to a “market perform” (hold) recommendation from “market outperform” (buy). But 2014 “is off to a lousy start, too.”
The retailer said it projects fourth-quarter sales of $513-million (U.S.) to $518-million, down from its earlier $535-million to $540-million. It expects same-store sales to slip in the “low to mid-single digits” compared with a previous no-growth estimate.
It’s estimating profit per share will be 71 cents to 73 cents, a drop from the earlier 78 cents to 80 cents. Analysts had anticipated profit per share of 79 cents on revenue of $541.3-million, according to Thomson Reuters I/B/E/S.
Ms. Landes predicted that so far this month Lululemon’s same-store sales – a key measure of retail health – are down double digits. “To say that these are weak results would be an understatement.” She said she is losing count of the number of times the company has lowered its forecasts in the past year or more, “which is not what we, or anyone else, wants to see in what is ostensibly a growth stock.”
Mr. Currie said in a statement Lululemon was on track to deliver on its sales and profit guidance through last month, but since January, “we have seen traffic and sales trends decelerate meaningfully.”
Lululemon spokeswoman Therese Hayes said in an e-mail it had “no issues related to quality” in the quarter. Rather, the company’s revised outlook “relates to slowdown in traffic at stores and e-commerce in early January. We have less promotional product in stores this January vs. last year and this may impact traffic at a time when consumers are looking for sales.”
Still, analysts are becoming more apprehensive about Lululemon’s short- and mid-term prospects.
“Revised guidance implies sales ‘fell off the cliff’ in January,” analyst John Zolidis at Buckingham Research Group said, reiterating his “underperform” rating on Lululemon shares. It means “a difficult task for the incoming CEO,” he said.
Christine Day will step down as CEO this month, and be replaced by Laurent Potdevin, former president of footwear specialist TOMS Shoes.
“The company has significantly under-invested in infrastructure,” Mr. Zolidis said. “It is pursing a reckless growth strategy internationally. It is also facing a significant increase in competition. Lastly, the Lululemon brand has been damaged by the company’s quality problems and chairman’s comments.”
He noted that Ms. Day sold essentially all of her equity in Lululemon immediately following the announcement of her resignation last June. “Experience suggests this will not be an easy fix,” he said.
Roxanne Meyer, an analyst at UBS who lowered her price target for Lululemon shares and fourth-quarter estimate, said it will take time for the new leadership team to gel and have an effect on the business.
Lululemon’s product innovation was probably hurt in the fourth quarter as it went through merchant leadership changes, she said. The pain will continue for another two to three quarters, she suggested. “We look for more limited margin expansion given continued investments, lingering sourcing issues and increased business complexity,” she wrote in a note. She reduced her fourth-quarter estimate to 72 cents a share from 78 cents a share.
BMO Capital Markets analyst John Morris said the loss of Ms. Day at Lululemon is “meaningful.” Her successor is capable but “it will take some time” and he expects “hiccups along the way.”