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Lululemon shares plunge amid 'state of turmoil' Add to ...

These are stories Report on Business is following Tuesday, June 11, 2013.

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Lululemon sinks
Shareholders of Lululemon Athletica Inc. have, as they say, been caught with their pants down today.

Shares of the yoga wear retailer plunged by about 17.5 per cent in the wake of the surprise announcement late yesterday that Christine Day is quitting as chief executive officer.

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Analysts also started to cut their price targets on Lululemon shares in what BMO Nesbitt Burns called a “state of turmoil” at the Vancouver-based company.

As Lululemon posted strong first-quarter results after markets closed yesterday, Ms. Day said she will step down when the company names her successor.

“The board also continues its search for senior supply chain and [executive vice-president] product heads,” BMO analysts John Morris and Jennifer Redding said after the announcement.

“We expect it to take some time to fill the all-important roles with the right people,” they added in a research note as they cut their price target on Lululemon shares to $65 (U.S.) from $75.

“Moreover, it takes time for new teams to gel.”

Even with what they projected would be a drop in the stock today, they still advised investors to be cautious “given the state of turmoil and change ahead.”

As The Globe and Mail’s Marina Strauss reports, Lululemon posted a 21-per-cent jump in first-quarter revenue to $345.8-million, and a 7-per-cent increase in the key industry measure of same-store sales.

Its profit rose to $47.3-million or 32 cents a share, from $46.6-million, also 32 cents, a year earlier.

Lululemon also forecast second-quarter revenue of between $340-million and $345-million, and sales of $1.65-billion and $1.67-billion for the full year.

It also projected earnings per share of between 33 cents and 35 cents for the second quarter, and $1.96 and $2.01 for the year. Next year, it will expand to Europe and Asia.

As well, it announced plans to quit the Toronto Stock Exchange, with a sole listing on Nasdaq, later this month.

Lululemon suffered some hits in the first quarter, notably the widely-publicized recall of some of its trademark Luon pants because they were see-through.

Not only that but, as Ms. Strauss writes, the company featured too many colourful shirts, with not enough neutral colours, certain to lead to greater-than-normal discounts.

Those are now being restocked, good news for the company and its dedicated customers.

“The key call-out is that the company is beginning to see pent-up demand and guests are returning as the black Luon has begun to flow back in stores and on the e-commerce site (just this week),” said Jennifer Black and Carlar White of Jennifer Black and Associates.

“The loyal hardcore LULU enthusiast knows what she likes and will not accept anything less,” they said, referring to the company by its U.S. stock symbol.

“Guests may have tried other brands during the black Luon hiatus, but they also expressed their disappointment in the fit, style, colour and performance of the product trade off. Once you go Luon, there is no going back to anything else, in our opinion.”

As the analysts see it, Lululemon is experiencing “significant” growing pains as it branches out.

“The company has a very loyal base of customers who are not just women who have climbed onboard the LULU train, but also men who have become much more engaged in the product offering and the attraction is growing,” they said.

“It is not only the merchandise that is inspiring, but it is also the culture of the company that is unique and differentiated from any other sports retailers we have followed,” they added.

“There is no other retailer that compete with the likes of LULU, in our opinion. However, we feel the company has gotten off course and has realized the necessity to adjust its offering to appease this dedicated and very loyal customer. We believe in this company and its product.”

Still, they advised investors to “sit on the sidelines and let the dust settle” amid expected short-term volatility.

Royal Bank of Canada analysts also cut their price targets on the shares, by 15 per cent to $70, citing the uncertainty that will come with a “major management transition.”

“While we are now on the sidelines with respect to the shares, we continue to believe that the Lululemon brand is strong and the company’s growth prospects remain compelling,” said RBC analysts Howard Tubin and Tal Woolley.

“We do not believe the current Luon issues will do long-term harm to the brand or the company’s ability to grow within and outside of North America,” they added.

“We would look for improved visibility on the new management team, and design and product direction to gain more comfort with the story.”

Kinross slips
Shares of Kinross Gold Corp. also slipped, down by more than 6 per cent, after its decision to halt development at a project in Ecuador.

The decision on the Fruta del Norte mine followed intense negotiations with government officials on striking “exploitation and investment protection” agreements.

This is despite plans by Ecuador to change its mining and tax laws.

“We have said that we will exert strict capital discipline across our company, that we will allocate our capital only to projects which meet our investment criteria, and that we will only enter into agreements that are in the best interests of the company and its shareholders,” said chief executive officer J. Paul Rollinson.

“After a great deal of effort to arrive at a mutually agreeable outcome, it is unfortunate that the parties were unable to reach an agreement on FDN which would have met those criteria,” he said in a statement.

"That said, we respect the government of Ecuador’s sovereign authority and its right to determine how its resources are developed.”

Kinross, which will take a charge of some $720-million (U.S.) in the second quarter on its decision to halt the project, and $20-million in costs for the shutdown, said it has been negotiating with the government for two years.

CanaccordGenuity analyst Steven Butler cut his target on Kinross shares to $7.70 from $8, downgrading the stock to “hold” from “buy” in the wake of the decision.

“The government of Ecuador appears unsupportive of any effort Kinross may make to monetize the project and will not extend the company’s permits for economic valuation beyond Aug. 1, 2013,” he noted.

CIBC shuffles ranks
Canadian Imperial Bank of Commerce shuffled its executive ranks, handing a new title to its head of wholesale banking, The Globe and Mail's Tim Kialdze reports.

The bank named Richard Nesbitt chief operating officer, which doesn't mean additional areas to oversee but does better reflect his growing role.

Tom Woods, the bank's chief risk officer, moves into the role of vice-chairman, to be replaced by Laura Dottori-Attanasio, the first woman to join CIBC's senior executive team in more than two years.

She had been global chief of corporate credit products.

Bank of Japan takes brighter view
The Bank of Japan disappointed some investors today as it held the line on stimulus measures while pointing to a pick-up in the embattled economy.

Exports are on the rise, the central bank said, as is factory production and consumer sentiment.

“Japan's economy is expected to return to a moderate recovery path, mainly against the background that domestic demand increases its resilience due to the effects of monetary easing as well as various economic measures, and that growth rates of overseas economies gradually pick up, albeit moderately,” the central bank said.

Absent today was talk of the extreme turmoil in Japanese stock and bond markets.

“There was a hope that the BoJ might somehow address the volatility and find some means by which to smooth it in its statement today – although, frankly, we’re skeptical that the BoJ possesses the necessary tools to do so,” said Derek Holt and Dov Zigler of Bank of Nova Scotia.

Encana taps Suttles
Encana Corp. has tapped a former BP PLC executive as its new chief executive officer.

Doug Suttles, the energy giant said today, has 30 years in the business, The Globe and Mail's Carrie Tait and Jeffrey Jones report. He also was the public face of the cleanup of the massive BP oil spill.

“Over the coming months, I look forward to working with the entire organization as we shape a strategy and plan that will grow shareholder value and unlock Encana’s full potential,” Mr. Suttles said in a statement.

He replaces the interim CEO and former chief Randy Eresman.

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