Lululemon Athletica Inc. is feeling the squeeze of its initiatives to improve the quality of its signature black yoga pants, prompting the retailer to lower its 2013 profit forecast amid delayed product shipments and rising expenses.
The late deliveries are having a domino effect on Vancouver-based Lululemon's ability to restock shelves fast enough, pinching potential sales not only of the pants but also matching tops.
"For us, that is a short-term pain for the long-term gain of really differentiating ourselves on quality," outgoing chief executive officer Christine Day said Thursday.
Fast-growing Lululemon is grappling with having to pick a new CEO after the well regarded Ms. Day said unexpectedly in June that she would step down when a successor is chosen.
At the same time, the chain is recovering from its see-through black-pant setback, racing to plug holes in its production processes and raising questions about whether it can overcome its challenges as it rushes to expand internationally.
"There are several questions that we need clarity on before we can again get excited about the stock," said Howard Tubin, retail analyst at RBC Capital Markets.
He pointed to the short-term uncertainty of Lululemon's leadership and supply chain issues. "As deliveries have been pushed back and new vendors are being signed on, it has become more difficult to predict inventory flows and levels are higher than ideal."
Lululemon's black-pants crisis, which forced the company to pull its core $98 stretch pants and other bottoms from shelves, resulted in it taking a $17-million (U.S.) writeoff. To help solve its production problems, it is investing $5-million in quality control measures this year, said chief financial officer John Currie.
The company is also investing in expanding its international business, and by next year will launch its first store in London in a key tourist and shopping area. It is also investing more in its e-commerce, and by mid-2014 plans to have a second distribution centre open in the United States to help ensure two-day shipping for online orders, Ms. Day said.
By 2016, the company plans to roll out men's wear stores to help bolster the men's sales, which now make up about 13 per cent of overall sales.
Still, the investments are pinching the company's gross profit margins, which it expects to be below those of last year in 2013 – in the "low-end" of the mid 50-per-cent range. Longer term, Mr. Currie still expects the company to enjoy gross margins of 55 per cent of sales.
Shipment delays are being prompted by the company's added inspections and quality control measures, forcing Lululemon to spend more money shipping products overseas by airplane rather than lower-cost deliveries to speed up product replenishment.
The added investments and lower anticipated sales resulted in the retailer trimming its outlook for the year. It is now projecting profit per share of between $1.94 and $1.97, compared to its earlier forecast of $1.96 to $2.01.
Annual revenue is now forecast at between $1.63-billion to $1.64-billion, down from its earlier projection of $1.65-billion to $1.67-billion.
Still, while second-quarter profit dipped from a year earlier, it beat analysts' estimates, though its stock fell 5.4 per cent on Nasdaq. Lululemon profit slipped in the quarter to $56.5-million or 39 cents a share from $57.2-million, also 39 cents, a year earlier. Revenue climbed 22 per cent to $344.5-million from $282.6-million, while same-store sales, a key measure in retailing, rose 8 per cent – almost half the pace of a year ago.
Ms. Day warned that production and shipping snags will persist "for a period of time." The company is overseeing more closely, for instance, the sewing of pants to ensure that "a sloppy [Size] 4 doesn't become a bad 6." Deliveries are arriving at stores three to three-and-a-half weeks late, with October and November shipments still not confirmed.